News last week that Israel’s Finance Minister will insure savers’ bank deposits means New Zealand will be left as the only country in the OECD that has no deposit insurance to protect savers’ funds should a bank fail.
Most Kiwis don’t know that their bank savings can be used to help bail out their bank should it fail. The technical term for it is a “haircut” and National introduced this in 2013 as part of their Open Bank Resolution.
Every other country in the OECD protects savers’ deposits with deposit insurance. Australians saving with the parent banks of ANZ, BNZ, ASB, or Westpac all have their deposits guaranteed up to $250,000. Kiwis saving with these same banks get no protection whatsoever.
Savers in New Zealand deserve the same protections savers have in the rest of the developed world. The OECD agrees.
Finance Minister Bill English ruled out deposit insurance in 2011 saying that it “is difficult to price and blunts incentives for both financial institutions and depositors to monitor and manage risks properly. No other developed country has the same problems.
On blunting incentives, otherwise known as ‘moral hazard’, Bill English can’t seriously expect everyday savers to analyse the loan books of banks to assess their credit risk when they open their accounts, let alone do this on a six-monthly basis.
Where I do agree with Bill English is when it comes to large investors. They should be required to assess the risk of their investments, hence the cap on deposit protection. We think $100,000 is a fair level of protection for New Zealand savers.
What would deposit insurance mean for savers? Depending on how the scheme is designed, banks would to pay a small regular premium (based on their credit rating) to fund an insurance pool that’s used to protect small depositors should it fail. This cost could be passed on to savers themselves as a $5-10 yearly fee on their accounts. It’s a small price to pay to know that your savings are safe no matter what.