Large changes are coming in the next phase of the overhaul of New Zealand’s bank and deposit taker regulation.
Deposit insurance cover will be doubled to $100,000 per eligible institution and extended to ‘transactional, savings and term deposits’, and the Minister of Finance will have the power to determine which types of lending the Reserve Bank can directly restrict through loan-to-value rations and similar controls.
An exposure draft of the Bill is expected in October this year, with the first reading likely in January 2022. We look at the detail which is available and consider some of the implications.
Deposit insurance proposals
The increase of proposed deposit insurance to $100,000 per eligible institution is expected to fully cover 93% of depositors, with the Treasury’s visual summary noting coverage of ‘transactional, savings and term deposits’.
While coverage is expected to be clear for basic core savings and transactional products, how and when protection applies to various other products in the market (such as PIEs and other securities) remains to be confirmed.
It will also be important to understand whether coverage is voluntary or compulsory (for instance, can a lender opt out of insurance entirely, or just for specific products in its portfolio).
The insurance is planned to be fully funded by levies on deposit takers with a Crown backstop to make up any temporary shortfall after a claim.
Treasury notes that ‘firms in the business of borrowing and lending’ are to be regulated as deposit takers (with requirements tailored to different classes of entity). The exact scope of this perimeter will be important to many in the market, and has been the subject of extensive consultation.
In particular, it will be important to confirm the extent to which regulation is limited to institutions that borrow via deposits from the public, rather than wholesale borrowing or bond issuances.
Although the Reserve Bank will continue to determine when and how to restrict lending, the announcement indicates that the Minister will have the power to determine which types of lending the Reserve Bank may restrict. This represents a potentially significant government control on the Reserve Bank’s activities in this area.
Depending on exact timing of when the exposure draft becomes available, there may be a relatively short further consultation period before the Bill is introduced to Parliament in January 2022.