RBNZ and Treasury release detail of deposit guarantee scheme

The Minister of Finance announced today that the Government has introduced an opt-in deposit guarantee scheme. The scheme covers deposits for New Zealand-registered banks and eligible non-bank deposit-takers (including banking societies, credit unions and finance companies).

As noted in his statement, the Reserve Bank and the Treasury are now releasing more detail about the scheme.

"The purpose of the scheme is to assure New Zealand depositors that they can be assured their deposits are quite safe and the New Zealand financial system is sound," said Reserve Bank Governor Dr Alan Bollard, and Acting Secretary to The Treasury, Dr Peter Bushnell.

More details of the scheme are below.

12 October 2008

OPERATIONAL DETAILS New Zealand Deposit Guarantee Scheme

This document outlines the key characteristics of the deposit guarantee scheme announced by the Minister of Finance this afternoon. Draft contracts containing the full details of the guarantee will be available on the Reserve Bank's website later this evening.

The Offer Under the terms of the Public Finance Act, the Crown will invite eligible institutions to enter a guarantee of their deposit liabilities. Eligible financial institutions, will be New Zealand registered banks and non bank deposit-taking financial institutions, who are fully compliant with the requirements of their trust deeds.

The decision to enter a guarantee with any specific institution, whether now or in the future, will be at the sole discretion of the Crown.

Which deposits will be covered? For New Zealand incorporated registered banks deposits from both residents or non-residents, will be covered.

For non bank deposit takers and for the unincorporated branches of overseas entities only deposits of New Zealand citizens and New Zealand tax residents will be covered.

Deposit liabilities will be covered regardless of the currency in which they are denominated.

Deposits and other liabilities owed to financial institutions, whether in NZ or offshore, are explicitly excluded from this guarantee.

How long will the guarantee last? The guarantee will be offered for a term of two years.

Fees The government will charge a fee for any guarantee offered on amounts in excess of $5 billion.

For covered liabilities in excess of $5 billion a fee of 10 basis points per anum will be charged for the guarantee. The fee will be charged on the basis of the total covered liabilities, in excess of $5 billion of the institution.

What will trigger the exercise of the guarantee? The Crown will make payment in the event of the liquidation of a guaranteed financial institution, if its assets are shown to be insufficient to meet the liabilities covered by this guarantee.

Administration These guarantees will be offered and administered by the Treasury.

Further Information For institutions wanting further information on their eligibility for this guarantee please contact the Reserve Bank on: 021 682 757.

Deposit Guarantee Scheme

Q & A

12 October 2008

What is a deposit guarantee scheme?

It is a facility where the Crown guarantees people who have deposits with institutions in the scheme. It covers all retail deposits of participating New Zealand-registered banks, and retail deposits by locals in non-bank deposit-taking entities. This would include building societies, credit unions and deposit-taking finance companies.

It only covers deposits and other debt securities.

What is "retail"?

Deposits by anyone other than financial institutions (eg banks and non-bank deposit-takers themselves)

What will it cost?

The scheme will be free for institutions with total retail deposits under $5 billion. A fee of ten basis points per annum will be charged on total deposits above $5 billion. This means that a bank with $20 billion in retail deposits would pay $15 million in fees per annum.

There is no direct fee for individuals, but institutions will determine if and how the costs of the scheme are passed on

What is the cost to the Crown?

This obviously depends on the degree (if any) to which it is drawn on (like any insurance scheme). Any guarantees will be recorded as unquantified, contingent liabilities of the Crown.

Why was the facility announced this afternoon? What precipitated it?

The government has moved today to ensure ongoing depositer confidence in New Zealand given the international financial market turbulence. The New Zealand banking system remains sound. This move is to give further assurance to New Zealanders that their deposits are safe. It follows other measures that have been undertaken by the Reserve Bank in recent weeks to ensure the liquidity of the banking system.

Why has this been done without legislation?

Parliament is not sitting, and therefore legislation can't be introduced. However, the Minister has powers under the Public Finance Act to act in this way.

Does this apply to non-banks / finance companies?

Yes it does, inasmuch as they meet the criteria (above). Customers should check with their institution to confirm whether they are going to seek cover.

It does not apply retrospectively.

What about non-residents?

For branches of overseas banks and non-bank deposit-takers, non-residents will not be covered.

Is this scheme comparable with the facility announced in Australia today? What about other jurisdictions?

>From what we've seen, the schemes are different - but both are aimed at encouraging confidence

Where can I go for more information?

Individual customers should talk with their banks or non-bank institutions.

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