Deposit insurance for New Zealand banks appears set to come under consideration again as the Government winds down its emergency retail deposit guarantee scheme during the next 14 months.
The Reserve Bank of New Zealand has not publicly discussed the use of bank deposit insurance since September 2008, and declined to make an update yesterday, but it is understood to be reviewing its options, given Australia is considering insurance and the end is in sight for New Zealand's retail deposit guarantee scheme.
New Zealand investors would be attracted to the safety of insured deposits, and analysts believe New Zealand banks would immediately follow suit if insurance was instigated in Australia.
New Zealand's emergency retail deposit guarantee scheme was implemented two years ago to shore up investor confidence during the height of the global financial crisis and failure of New Zealand finance companies.
But the extended scheme, which began yesterday, covers just seven companies, as opposed to more than 90 institutions or funds during the past 24 months.
New Zealand and Australia are the only two OECD countries which do not have deposit insurance, and Australia, whose banks own all New Zealand's major banks, has given consideration to implementing it.
Director of the Centre for Banking Studies at Massey University Dr David Tripe said it would have to be proven there was no adverse consequences for New Zealand depositors in not following Australia's example.
However, he believes deposit insurance has its down sides and is "not enthusiastic" about the idea, citing US research which found banks increased their prospect of failure by taking more risks if they were covered by insurance.
"It's a matter of undermining incentives for banks to take care and act prudently," Dr Tripe said.
Bank deposit insurance was fully instituted in the US in 1934, and had been around earlier, with banks being charged for the insurance through their respective central banks, but this cost was passed on to customers in slightly increased interest margins.
Craigs Investment Partners broker Peter McIntyre said there was no immediate need for banking insurance in New Zealand, as Australia and New Zealand banks were stable after the global crisis.
He did not think there would be a large "run" of funds heading across the Tasman if Australia instituted banking insurance.
"If Australia put banking insurance in place, there's no doubt New Zealand would follow suit immediately - follow big brother," he said.
Dr Tripe said, preceding the failure of South Canterbury Finance, which was covered by the Government's retail deposit guarantee scheme, the southern finance giant was led to take more risks than necessary.
"Its failure was a consequence of the guarantee - being able to raise deposits and then lend out," Dr Tripe said.
The Reserve Bank's September 2008 paper on deposit insurance said it might help promote depositor confidence, especially in times of finance sector stress and may reduce political pressure to "bail out" a bank.
However, insurance could weaken market discipline and exacerbate moral hazard, and the more generous an insurance scheme was, the weaker the incentive would be for depositors to go into deposit schemes on the basis of soundness and safety, the Reserve Bank said.
