A Depositor Compensation Scheme will come into effect in New Zealand on 1 July, 2025.
Peter Nicholl
With this, New Zealand will finally join most of the other countries in the world in having a formal system of deposit insurance. The first deposit insurance scheme was established in Czechoslovakia in 1924, just over 100 years ago. The USA followed in 1934 and most other countrries joined the move to set up formal deposit insurance schemes during the 1980s and 1990s. In all, over 140 countries have some form of deposit insurance.
But New Zealand wasn’t one of them. When the global financial crisis hit in 2008, this proved to be a problem. The Government of the day felt the need to introduce an emergency deposit guarantee scheme. At its peak the scheme guaranteed deposits of $133 billion in 72 financial institutions. The major weakness of this emergency scheme was that it was not funded by the deposit-taking institutions that were being guaranted, it was funded by, and was a big risk for, the Government. This scheme was reduced in size in 2010 and ended on December 31, 2011.
I wasn’t living in New Zealand at that time but I think it was recognised that having a formal and permanent system of deposit insurance funded by the financial institutions, as most other countries had, was a much better option than a temporary
emergency scheme with the risk being borne by the Government – in other words by the taxpayers.
I am not sure why it has taken almost 14 years since the temporary scheme finished in 2011 for the permanent scheme to be established. When I was Governor of the Central Bank of Bosnia and Herzegovina we introduced a deposit insurance scheme for their banks. The process took about a year. But the New Zealand scheme will finally start in two weeks time. This new deposit insurance scheme will be funded by levies on the deposit-taking institutions that are coverted, though their will be a Crown backstop for additional support but hopefully that backstop won’t need to be called upon.
Deposit insurance schemes in many countries only cover banks. But the New Zealand scheme will also cover non-bank deposit takers. The Reserve Bank has published a list of the 28 institutions that will initially be covered – 14 banks, six finance companies, four building socities and four credit unions. There are a lot more finance companies, building socities and credit unions than that in New Zealand but most of them do not take deposits from the public. If a person is uncertain about which institutions are covered they can check the list on the Reserve Bank’s website. The assets of the 14 banks covered by the scheme total $715 billion. The assets of the 14 non-banks covered by the scheme total $3 billion.
Existing deposits in these institutions will be automatically covered from July 1. But there is an upper limit of $100,000 per person per institution. Most other countries have an upper limit also – the United States US$250,000, European Union 100,000 Euros, Australia $250,000 and United Kingdom 85,000 pounds. Though the New Zealand limit is significantly lower than these countries, the Reserve Bank has estimated that 93 per cent of the total deposits in the covered institutions will be protected despite this limit. So the scheme will be very comprehensive.
