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Winners and losers on new RBNZ playing field

04 April 2023

This article is an excerpt from our latest report The banking industry: A look ahead

The RBNZ is fundamentally redesigning the domestic banking sector, pursuing a dizzying rate and range of change, much of which simply brings New Zealand into line with international norms but some of which is disconcertingly original.

The latest volley is being delivered through the Deposit Takers Bill, in particular the depositor compensation scheme, to come into force in 2024, which will provide an explicit government guarantee over the first $100,000 in retail deposit accounts.

This will catch New Zealand up with other OECD countries and is designed to create ballast against the risk of bank runs, but may trigger some other market responses, either neutral or negative depending on commercial positioning. These include:

  • Large depositors splitting their banking relationships over a number of providers; and
  • Providing a growth opportunity to existing non-bank deposit takers and to new entrants (especially in the “challenger bank” online space).

In practice, the effects of deposit insurance are often difficult to predict.  At a retail level, opening and maintaining accounts at different banks is cumbersome, although the Customer Data Right and fintech solutions may serve to ameliorate that.  And in a world of high inflation the incentives on customers to seek out better returns are higher.

The extent of change will likely depend on:

  • How levies are imposed, and the level of regulation placed on deposit takers of different sizes (particularly in the wake of SVB’s failure) – i.e. the cost of admission to the scheme for smaller non-banks.
  • Public and investor confidence in the system:
    • Credibility with the public will depend on immediate (or almost immediate) pay-out, a function that will sit with the RBNZ and will be frustratingly complex to design. Deposit takers will have to devote significant resource to make the regime work well for users, in particular the systems changes needed to meet the new “single customer view” standards to identify eligible customers and their entitlements; and
    • The $100,000 limit, although twice the $50,000 amount initially proposed, is still significantly lower than other jurisdictions, such as the US$250,000 cap in the United States – and the SVB crisis has shown that even those limits may not be high enough.

 

The wholesale-funded non-bank residential mortgage sector continues to largely side-step regulation – apart from CCCFA and lending standards, such as loan-to-value and debt-to-income ratios as monetary policy butts against housing price controls.  However the need for these has abated as the housing market has turned. Life for local branches of overseas banks, by contrast, is set to become harder as the RBNZ tightens its control on their activities in New Zealand and seeks to exclude them from the retail banking market. 

This isolationist approach could be an own goal for the New Zealand economy if global banks retreat from the specialist services they now provide here - unless or until fintech and similar businesses fill the void.

Full compliance with the RBNZ’s outsourcing requirements as transition periods expire later this year will require that New Zealand banks have the domestic capability to continue operations even in the event that an Australian parent bank collapses. 

This will provide opportunities for third party providers as banks look beyond their parent entity for services.

This article is an excerpt from our report The banking industry: A look ahead. Download the full report at the link below, or read the other articles in the series. 

Read the full report

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