Bank run in Greece

Why is New Zealand still the exception on deposit protection?

I took the opportunity to question the Reserve Bank Governor, Graeme Wheeler, about New Zealand’s lack of deposit protection in front of the Finance and Expenditure Select Committee in Parliament yesterday.

Why does the Reserve Bank continue to oppose protecting the savings of everyday New Zealanders should one of our banks get into trouble?

New Zealand is the only country left in the OECD that doesn’t offer deposit insurance on savings but Graeme Wheeler is still defending our exceptionalism with the tired “moral hazard” argument – put out a safety net at the bottom of the trapeze and you encourage more risky behaviour above it.

But a safety net for New Zealand savers makes sense. We deserve the same protection every other developed economy enjoys.

The Governor mistakenly believes that everyday Kiwis know how to assess the relative strengths of our banks and price the risk accordingly. Well, the reality is that we don’t. That’s his job and the job of wholesale lenders. Market discipline happens at the wholesale funding level by sophisticated investors lending millions and millions of dollars to the banks. They’re not likely to suffer from the moral hazard of deposit insurance because their investments are not covered by deposit insurance.

It’s time to enhance our country’s financial security by establishing deposit protection for all New Zealand savers. We’ll pay a small premium for the peace of mind, but an extra $5-10 per year will mean we’ll never have to worry about losing all our savings if our bank ever gets into difficulty.

James