Bank Turmoil Highlights This Nation’s Lack Of Deposit Insurance

(Bloomberg) -- Is my money safe?

That’s the question reverberating around the globe, as turmoil grips the financial system in the aftermath of the collapse of three US lenders. Deposit insurance means the answer is usually yes — but not in New Zealand.

The South Pacific nation is one of only two countries in the OECD — Israel is the other one — that don’t offer such a guarantee, according to the New Zealand government. Worldwide, 94 nations, ranging from the US to Hong Kong to Azerbaijan, have a deposit insurance system in place. 

Read more: How to Stay Calm Navigating the Silicon Valley Bank Turmoil

“The recent failures in the US create a lot of nervousness,” said Claire Matthews, associate professor at Massey University Business School in Palmerston North, New Zealand. “The reality is that banking is all about trust and if banks lose trust, it’s really hard to get that back. Having deposit insurance would provide a level of trust.”

The New Zealand government is in the process of passing legislation that will guarantee as much as NZ$100,000 ($62,000) per depositor per bank, but it’s not expected to be enacted until later in 2023.

Finance Minister Grant Robertson said there are no plans to fast-track the legislation, as the government wants to “get it right.”

Banks currently hold significant buffers of excess capital and liquidity over regulatory minimums.”

‘A Tradeoff’

New Zealand is not completely without consumer protection for bank customers. The Reserve Bank operates the Open Bank Resolution, which means authorities can re-open a failed bank the next day to give customers access their accounts. However, a portion of customers’ money may be frozen to absorb losses. 

Some of the banks operating in New Zealand — such as ANZ Bank New Zealand, Westpac Banking Corp., ASB Bank  and the Bank of New Zealand — may also be covered by the deposit guarantees of their Australian parent companies.

While bank failures are unusual in New Zealand, the nation is not completely immune — the government had to rescue the BNZ in 1989 and 1990. There were also a rash of finance companies that collapsed in the wake of 2008’s global financial crisis, causing some New Zealanders to lose their life savings and prompting the government to launch a temporary deposit insurance scheme between 2008 and 2011 to shore up the sector.

Because New Zealand’s banks are well capitalized and tend to stick to “vanilla retail trading,” there hadn’t been an urgent need for deposit insurance, according to John Kensington, head of bank and finance at KPMG New Zealand. He said taking time to get the legislation right would hopefully avoid unintended consequences.

Still, the situation the last few days has provided a stark reminder of “just how damaging and how difficult to stop a run can be for a bank,” he said. 

“It’s a tradeoff,” Kensington said. “You probably wouldn’t go two months without your car being insured while you worked out which was the best insurance company to go with.” 

More stories like this are available on bloomberg.com

©2023 Bloomberg L.P.