New bank scheme serves as rebuke to RBNZ's decades old approach

9:25 pm on 24 June 2019

Analysis - The days of light handed regulation of the banking sector look to be coming to an end.

Reserve Bank building.

Photo: RNZ

The government plans to bring in a bank deposit insurance scheme, which would protect up to between $30,000 and $50,000 of depositors' funds in the event of a banking collapse.

New Zealand has been one of the few developed economies not to have such a scheme. Details have yet to be given such as how it would be paid for, but it runs counter to the prevailing thinking which has been for depositors to take a "haircut", that is lose some of their money, in the event of a failure because they had been benefiting from the banks' dealings previously.

The leading global finance bodies - the International Monetary Fund, and the Organisation for Economic Co-operation and Development - have long recommended such a scheme.

"Our banks are safe and sound. However, the OECD and IMF have said that our banking system might be more vulnerable in a crisis because we don't have a deposit protection regime. A deposit protection regime will increase public confidence in the banks," Finance Minister Grant Robertson said.

During the global financial crisis the then Labour government had its arm twisted to agree to a deposit insurance scheme, when the Australian government decided it would bring in such a scheme for its main banks, all of which operated in this country.

However, the Reserve Bank's senior executives have previously argued against such a scheme citing "moral hazard", namely that banks would be less diligent about avoiding and reducing risks if they thought they would be bailed out.

The RBNZ's current move to make the big banks significantly increase their level of capital to cope with a financial crisis, has drawn staunch opposition from the banks, with direct forecasts of rising borrowing costs, credit rationing, and lower deposit rates.

The deposit insurance scheme may allow the RBNZ to step back from some of its more extreme proposals, but it is also something of a rebuke to the RBNZ's laissez-faire approach of more than a decade.

The government has also signalled that it is looking at sheeting home accountability directly to individual bank executives, similar to Australia and Britain, which have systems nominating individual decision-makers at banks, who may be held directly responsible in the event of problems.

And more change may be coming for the RBNZ. The deposit insurance scheme, and tighter regulation of bankers are part of a broader review of the central bank, part of which includes whether the RBNZ should remain the main regulator of the banking sector.

Meanwhile, the RBNZ and the Financial Markets Authority have said they have got undertakings from retail banks to scrap sales incentives for front line staff and improve their treatment of consumers.

All of this was on top of the RBNZ's forcing the country's biggest bank, the ANZ, to deliver two reports - one on how ANZ calculates its capital reserves, and a second on the way its directors and executives run the business.

Life just got tougher for the country's banks, those that run them, and perhaps for those that supervise them.

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