Cautious backing but misgivings on savings protection

Explainer: A deposit guarantee scheme could be in place for next year, but don’t bet on it, writes Rob Stock.

Adeposit guarantee scheme will reduce the return people get on their savings accounts and term deposits. However, it’s not one of the cost-adding Labour Party policies being targeted by business or the Opposition.

Since Chris Hipkins was sworn in as prime minister this week he has pledged to ‘‘take a ruler’’ to all Labour’s policies before the general election. Business and rightleaning Opposition parties are putting pressure on Hipkins to axe fair pay agreements, Three Waters reform, and the proposed worker income insurance scheme.

But there’s cautious cross-party support for New Zealand joining the likes of Australia and the United Kingdom in having a deposit guarantee scheme.

The scheme is intended to guarantee $100,000 of each individual’s savings at a bank or other deposit-taker that fails.

Consumer NZ says that would cover 93% of bank deposits, but that could rise if wealthier people start strategically spreading their deposits across multiple banks to maximise their protection.

The scheme would be funded by a taxpayer-backed fund like the Toka Tu¯ Ake Earthquake Commission fund, built up over time by levies paid for by deposit-takers, which all parties agree will be ultimately passed on to depositors as lower savings and deposit rates.

The levies will be set by regulation, and the size of them is not yet known, which is making banks, other deposit-takers and National MPs nervous.

Nicola Willis, National’s deputy leader, told Parliament in September that if the bill was done badly, it would come at high cost to depositors.

Low deposit rates and high inflation have eroded the value of people’s money in the bank.

In July last year, when inflation hit a 32-year high of 7.3%, the average weighted six-month deposit rate was just 2.89%, data from the Reserve Bank Te Pu¯ tea Matua shows.

By the end of the year, the average deposit rate was just over 4%, and inflation was 7.2%.

While the Government hopes the deposit guarantee scheme will be in place by early 2024, banks want things to go more slowly.

They have told MPs that care is needed to minimise the chance of unintended consequences, saying the Government botched up consumer lending reforms in late 2021 and caused a slowdown in lending by moving too fast and without care.

Banks are keen that levies are risk-based so that smaller, riskier deposit-takers don’t get a boost by being able to offer guaranteed deposits while making riskier loans. Banks also want a guarantee that in the event of a deposit-taker failing, they don’t end up paying higher levies to rebuild the fund that will back the scheme.

The Taxpayers’ Union has called for finance companies to be excluded altogether, given the sector’s history of ‘‘scandal and Serious Fraud Office investigations’’.

Giving finance companies a taxpayer guarantee would risk a repeat of a sudden flow of money into riskier companies, it said.

Finance companies themselves fear that they will end up subject to high costs and ‘‘intense’’ regulation. Simon Jensen, a consultant at law firm Buddle Findlay, described this as ‘‘the stability of a graveyard’’ in his submission to Parliament.

The Financial Services Federation, a lobby group for finance companies, said there were now just 15 non-bank deposittakers left.

‘‘Their combined size when compared to any of the registered banks is miniscule. However, they provide valuable competition to the banks and distinct benefits to those individuals and businesses who choose to use them,’’ executive director Lyn McMorran said.

Banks have told MPs care is needed to minimise the chance of unintended consequences.