Saturday, May 25, 2024

Deposit compensation scheme becomes law

New Zealanders will have up to $100,000 of their deposits in any eligible institution guaranteed in the event that institution fails under legislation passed in Parliament on Thursdsay.

The Deposit Takers Bill passed its third reading as the third and final piece of legislation in a comprehensive review of the Reserve Bank of New Zealand Act.

“The passing of this bill will allow for the introduction of depositor protection and close a long-standing gap in New Zealand’s financial safety net, bringing New Zealand in line with international best practices,” said Finance Minister, Grant Robertson.

“This means eligible New Zealanders will be provided economic security if their bank or other deposit taking institution fails, while helping protect the country’s financial system and wider economy. The $100,000 limit will fully protect around 93% of depositors.”

The Bill brings all deposit takers – such as banks, credit unions, building societies and finance companies – under a single coherent regulatory framework and protects New Zealanders’ money through the introduction of a depositor compensation scheme.

The Bill also gives the Reserve Bank the ability to set standards as the main tool for imposing prudential requirements and modernises the regulation and supervision of all deposit takers and strengthens New Zealand’s crisis management framework.

“The Reserve Bank will have stronger and a broader range of supervisory and enforcement powers to ensure compliance and avoid breaches,” Mr Robertson said.

“The Reserve Bank and Treasury will soon consult with banks and other deposit takes on the funding strategy and levy framework for the Depositor Compensation Scheme, which is intended to be up and running by the end of 2024.

“Overall, the Bill considerably strengthens New Zealand’s financial system safety net and contribute to a robust framework of protections for depositors.”

The Bill comprises three main parts. These are:

  • A framework for the prudential regulation and supervision of deposit takers: the objectives for the Reserve Bank under new sectoral legislation for deposit takers; the prudential boundary for ‘deposit taking’; the licensing framework and how prudential requirements will be imposed; a new accountability framework for directors of deposit takers; the suite of supervisory and enforcement tools available to the Reserve Bank, and; the appeal rights afforded to parties impacted by prudential decisions of the Reserve Bank.
  • Introduction of a formal scheme to protect depositors from loss if a deposit taker fails. New Zealand has been an outlier internationally given the absence of such a scheme in this country. Depositors will be covered up to $100,000 of their deposits at any single deposit taker once the scheme is implemented.
  • New Zealand’s deposit takers’ crisis management framework has been strengthened, informed by international experience during and since the global financial crisis, but tailored for New Zealand circumstances. The framework provides a clear mandate for the Reserve Bank as the resolution authority, while enhancing the powers available to manage a deposit taker in distress.

Currently, all OECD countries have deposit insurance except Israel and New Zealand. Globally, there are 92 jurisdictions having deposit insurance schemes in place, according to International Deposit Insurance Association.

The Deposit Takers Bill follows the Reserve Bank of New Zealand (Monetary Policy) Amendment Act 2018, which changed the objectives and decision making process for monetary policy, and the Reserve Bank of New Zealand Act 2021, which dealt with institutional arrangements for the Reserve Bank.

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