Tuesday, October 14, 2008

New Zealand Banks Flock to Deposit Insurance

As expected, the major trading banks have flocked to sign up for the New Zealand government's deposit guarantee scheme that will cover the deposits, without limits, of banks, building societies, credit unions, and finance companies for the next two years.

ANZ-National, BNZ, ASB, Westpac, TSB, SBS Bank and Government-owned Kiwibank have all indicated they will sign up. Only institutions with deposit liabilities in excess of $5 billion are required to pay a fee for the guarantee. That fee will likely run at around $15 million for most of the larger insitutions. The fee structure does not allow for any risk-based pricing.

The scheme is being criticised because it affords finance companies that have engaged in riskier behavior than other financial institutions the same level of protection without an associated hike in the insurance premium they pay. Moreover, finance companies that have gone into receivership because of mismanagement in the last few years could be revived, and if found to be in compliance with their trust deeds, eligible for new deposit insurance coverage. Reserve Bank Governor, Alan Bollard, has confirmed this but also pointed out that deposit insurance is not retrospective - it does not cover deposits lost in financial collapses prior to introduction of the guarantee.

As for the two year limit on the deposit guarantee, it would be a brave, some might save foolhardy, government that sought to remove the guarantee at the end of two years, even in prosperous economic times. It would likely have the same destabilising effect as the removal of wage and price controls has: despite all assurances, it could be expected that depositors would engage in flight to a safer haven for their funds.

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