Taking Stock 10 July 2025

Fraser Hunter writes:

EARLIER this month, the Depositor Compensation Scheme (DCS) came into effect, offering government-backed protection of up to $100,000 per eligible depositor, per deposit taker.

The scheme has been in the works since 2016, with legislation passed two years ago to bring it into law. New Zealand has historically been an outlier from other developed nations, being one of the last countries not to have some form of deposit insurance.

Eligible deposits are automatically covered, so unlike many reforms, this one requires no action.

The Reserve Bank estimates that around 93% of individual depositors are now fully covered. However, the majority of total deposits by value remain outside the scheme, concentrated in large balances and wholesale accounts.

While the initial impact has been modest, the scheme could have a meaningful influence on how cash positions are structured and managed, particularly by conservative retail investors.

Deposit insurance has long been a standard feature of most developed economies, designed to support financial stability and prevent loss of confidence.  It runs on liquidity during times of stress.

Following the GFC, New Zealand chose a different approach, where it introduced the Crown guarantee temporarily, however this was short-lived and prickly from a political standpoint.

In the years that followed, policymakers opted for a light-touch approach, relying on the perceived strength of the banking system. That left retail depositors exposed to a small but real risk of loss if a failure occurred.

The new scheme addresses that gap. It forms part of a broader regulatory reset under the Deposit Takers Act, which strengthens the Reserve Bank’s oversight of banks, credit unions and building societies. The scheme is not intended to prevent institutional failure, but to reduce the fallout should one occur.

New Zealand’s $100,000 cap looks modest next to comparable countries. Australia covers $250,000 (NZ$270,000), the US covers $250,000 (NZ$410,000), and the UK covers £85,000 (NZ$175,000). Hopefully this is something that is reviewed over time, taking into account inflation or changes in household saving behaviour.

The scheme covers deposits held with all registered New Zealand banks, as well as licensed credit unions, building societies, and some finance companies that meet regulatory requirements. At implementation, 29 companies were part of the scheme, ranging from household names to a few lesser-known entities like Xceda and Welcome Limited, which may require an internet search.

Starting this month, the scheme will be funded via levies ranging from 0.1% to 0.4% of protected deposits, with riskier institutions paying more. The Reserve Bank will assess each institution's risk profile, ensuring costs align with the risks they bring to the system. Smaller credit unions and building societies receive a temporary flat levy until 2028 to ease the transition.

The goal is to build a fund worth 0.8% of protected deposits, approx. $1 billion, over the next 20 years. Should this prove insufficient during major failures, the Crown provides backstop funding through cost-reflective loans that the industry must eventually repay.

Only NZD deposits held with licensed New Zealand entities are covered. Funds placed with offshore banks or through international platforms fall outside the scheme, even if the provider has a familiar brand or operates locally. Foreign currency accounts are excluded.

The payout process is designed to be automatic and swift. When the Reserve Bank determines a licensed deposit taker has failed, the DCS activates immediately, with no need for deposit holders to file a claim. 

The goal is to provide access to protected funds within days, not weeks, though complex cases involving disputed ownership may take longer.

The early impact on offered deposit rates has been subtle but noticeable. Over the past month, benchmark interest rates have declined, yet advertised term deposit rates from the major banks have remained largely unchanged. Most continue to offer 12-month rates of 3.8% - 4.0%.

What has shifted is the margin between major banks and smaller or lower-rated deposit takers. That gap has narrowed significantly. Institutions such as Heartland and Rabobank, which have traditionally offered a clear premium, are now offering rates in line with the majors. 

In effect, some banks appear to be accepting tighter margins to remain competitive and or retain market share. The presence of the guarantee may be reducing perceived risk, encouraging more direct rate comparisons between institutions, particularly among cautious savers.

Investors can significantly increase their protected deposit amounts by spreading funds across multiple licensed institutions. Further protection can be gained by holding deposits under different legal entities, such as trusts, companies, or joint accounts.

However, this approach comes with trade-offs. Managing multiple accounts adds administrative complexity, including the need to track maturity dates, interest payments, and tax reporting across multiple providers. Each account also requires full identity verification under anti-money laundering (AML) rules, which as we know can be time-consuming and frustrating.

The scheme represents progress, but several important concerns remain unresolved. 

The fund will take 20 years to reach its $1 billion target, which leaves it underprepared in the early years. If a large bank were to fail during this period, the scheme would still rely on government and taxpayer support. 

Even at full funding, the target size falls well short of covering a major bank, meaning the informal Crown guarantee still applies to the major institutions. 

There are also concerns about fairness, as the larger banks are expected to provide most of the funding, to the benefit of the smaller and riskier institutions.

Smaller banks may also struggle with the compliance burden and increased levies, while the Reserve Bank will need to scale up its oversight to manage risks across the system.

At the same time, it is hard to feel too much sympathy for the banks, given their dominant market share, strong profits, and longstanding criticisms around weak competition, slow innovation, and poor customer treatment.

Hopefully the scheme may also enable more innovation in how cash is managed. Overseas, aggregator platforms, or money-supermarkets, allow investors to open and manage multiple deposit accounts across different institutions using a single account, helping diversify deposits while keeping them within coverage caps.

In New Zealand, some of this infrastructure already exists. FNZ (the technology provider for Hatch), for example, already can place client funds across several major banks through its platform. Over time, this functionality could be extended to a wider range of deposit takers, offering more flexibility for advisers and investors.

However, consolidator services come with additional costs. That raises the question of whether the investor, the platform or the bank should bear it. Historically, banks have been reluctant to support such models, preferring to retain direct client relationships.

Given we are only in the second week of the scheme, change may be some way off, but investors now have a clear indication of what returns are available for essentially no risk.

Travel

Christchurch – 23 July – Fraser Hunter

Auckland – 24 July – Edward Lee

Auckland – 25 July – Edward Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee & Partners