NZ Government Scheme Allows Up To $100,000 Deposit Protection Limit

Date Jun 18, 2021
Blog category Kiwisaver
By Khristine Eusebio
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Good news to all Kiwi borrowers as the NZ government has recently announced a guaranteed deposit of up to $100,000 should a bank go bankrupt. This initiative protects about 93% of Kiwi borrowers.

In 2019, Finance Minister Grant Robertson signaled the government's intention to introduce a "deposit protection regime" in the hopes of increasing public confidence in banks and eventually giving New Zealand bank protections like the rest of the OECD.

Initially, the government proposed a $50,000 limit for deposit protection but eventually increased it to $100,000 after getting feedback from the banking sector. These measures are made to protect more Kiwis and avoid damage from excessive risk-taking by the deposit-taking sector. It's part of a review of the Reserve Bank Act to ensure protection and promote financial stability.

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What does this mean for Kiwis?

Trusting a bank to keep your hard-earned money is a big step, so just imagine losing your savings if they suddenly collapse or fail. These recommendations will strengthen New Zealand's financial safety net and provide Kiwis the necessary protection they need if a bank or financial institution goes bankrupt.

If pushed through, Kiwis can have their deposits of up to $100,000 in any qualified establishment guaranteed if said institution collapses or encounter any failures. The goal is to have it implemented in 2023.

Licensed deposit-taking institutions include the following:

  • banks
  • credit unions
  • building societies
  • finance companies

No details were given regarding the scheme's funding, but the Treasury mentioned during the earlier consultation that levies on banks usually fund schemes. According to The Banker's Association chief executive Roger Beaumont, the association has supported a risk-based approach to setting levies. This means banks and other lower-risk entities would pay lower levies since they were less likely to call on the scheme.

Apart from that, banks are also facing higher costs as Reserve Banks have decided to have higher minimum capital requirements to help them survive in case of financial shocks. According to Beaumont, it's vital to study how the new scheme would work with Reserve Bank's "open bank resolution policy".

Reaching this stage was an achievement as this will help strengthen the way things work for all eligible institutions that take deposits.

What is the Reserve Bank?

The Reserve Bank has been responsible for regulating deposit takers in banks for more than 30 years now. They make sure their money is safe and in good hands, overall promoting the prosperity and well-being of Kiwis.

It will also help the Reserve Bank by giving tools to address possible problems and improve the crisis management framework that will lessen the damage on the financial system, economy, and more in case of failures and issues.

This insurance will cover eligible banks, credit unions, building societies, and finance companies. The deposit insurance scheme is being reviewed by the Reserve Bank of New Zealand Act, which is known for its extensive consultation. It also includes setting lending restrictions like LVRs (loan-to-value ratios), a new process for the Reserve Bank.

The Reserve Bank will use these LVR restrictions to limit banks' mortgage lending to Kiwi borrowers with low deposits. It has already been introduced in 2013 to cool the property market but was lifted in 2020 because of COVID-19. Unexpectedly, there was a surge in the property market despite the pandemic, which led the Reserve Bank to bring back LVRs this year.

Starting May, from 30%, property investors have to provide a 40% deposit while owner-occupiers need 20%. Part of these changes includes the Finance Minister's significant participation in figuring out the types of lending the Reserve Bank can directly restrict, which the Reserve Bank will then use to identify the appropriate tool to use and how to apply restrictions.

The NZ Government also ordered the Reserve Bank to consider the house prices when making decisions last February.

The drafting of the legislation is already in progress, and the Bill is expected to be introduced to Parliament by the end of the year.

Trusting your money in a bank or investing it for your future is a big and sometimes risky move, but with the right bank or savings scheme plus the government and establishments’ continuous effort to improve regulations for Kiwis, you can sleep soundly at night knowing your money is in good hands. At the end of the day, these reforms' goal is to protect New Zealander's savings, reduce the risks of unemployment, and encourage them to keep participating in the financial system.

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