New Zealand: Crown Retail Deposit Guarantee Scheme

In the aftermath of the failure of Lehman Brothers, the G-7 countries agreed to maintain sound deposit insurance systems (Group of Seven 2008). At the time, New Zealand had no deposit insurance scheme (Clark 2008). However, when Australian authorities informed New Zealand that Australia would guarantee deposits, New Zealand officials on October 12, 2008, announced what they believed to be a similar scheme (OAG 2011; Reserve Bank 2008d). The Scheme was meant to reassure depositors and avoid a flight of funds to Australia (OAG 2011; Reserve Bank 2008d).

However, New Zealand officials misunderstood the terms of Australia’s guarantee. They believed that Australia’s guarantee would cover nonbank financial institutions as a “full guarantee” (Dann 2018). The Australian guarantee did not cover these institutions.

In addition to the Scheme, on November 1, 2008, the Treasury announced the Wholesale Funding Guarantee (Treasury 2010a). The Wholesale Funding Guarantee was a “facility [for] investment-grade financial institutions in New Zealand,” meant to help banks issue short-term debt on wholesale funding markets and preserve the domestic economy’s access to foreign credit (Cullen 2008; Fang 2020). This program was meant to facilitate access to international funding markets after similar guarantees were announced in other countries, including Australia (Cullen 2008; Treasury 2008b) (see Fang 2020). Australia and other countries had announced deposit insurance and wholesale funding guarantees at the same time.

When the Scheme was established, Parliament was not sitting; the Minister of Finance, who heads the Department of the Treasury, was thus forced to act pursuant to his legal powers (Reserve Bank 2008b). As such, the Scheme was established pursuant to the Public Finance Act of 1989 (Reserve Bank 2008d; Public Finance Act 1989, sec. 65ZD). According to section 65ZD, the Minister of Finance can guarantee accounts if it is “necessary or expedient in the public interest to do so” (Public Finance Act 1989, sec. 65ZD). Later, the Parliament passed the Crown Retail Deposit Guarantee Scheme Act of 2009 to extend the Scheme until December 31, 2011, alter fees, and tighten eligibility criteria (CRDGS Act 2009, pt. 2[6][1]).

The Treasury and the Reserve Bank were both involved in designing the Scheme (OAG 2011). The Treasury, though, was responsible for administering the day-to-day operations of the Scheme, including monitoring accepted institutions (OAG 2011). Such monitoring, though, only began in March 2009 (OAG 2011).

To enroll in the Scheme, institutions needed to apply (OAG 2011). The Treasury would then determine whether an institution was eligible for the Scheme (OAG 2011). In cases where participating institutions were unable to fulfill redemptions, the Treasury executed the guarantee, acting as the institution’s insurer and receiver (Reserve Bank 2008c).

The Treasury contracted the Reserve Bank to monitor financial institutions and to advise the Treasury on whether certain institutions met the Scheme’s eligibility criteria (OAG 2011). The Treasury could appoint inspectors to validate monitoring information (OAG 2011).

In 2011, the Office of the Auditor-General conducted an evaluation of the Scheme, pursuant to section 16 of the Public Audit Act of 2001 (OAG 2011; Public Audit Act 2001). The Office of the Auditor-General reported that the Scheme had achieved its goal—no banks failed—but faced several challenges (OAG 2011). As such, the Auditor-General provided the Treasury and the Reserve Bank with policy recommendations (OAG 2011). See the Evaluation section for a discussion of the Auditor-General’s report.

Leading up to October 12, 2008, New Zealand officials had been in communication with their Australian counterparts, discussing whether guarantee schemes would be required in each jurisdiction (OAG 2011). On October 12, 2008, Australian officials informed those in New Zealand that a deposit insurance scheme would be announced (OAG 2011). This prompted the New Zealand Treasury, on October 12, 2008, to announce the Scheme (Reserve Bank 2008d).

The Scheme was meant “to ensure ongoing retail depositor confidence in New Zealand’s financial system, given turbulence in the international financial system” (Treasury 2009a). The Auditor-General underscored the Treasury’s “adequate and timely” communication about the Scheme, both with the public and with New Zealand’s government (OAG 2011). The Auditor-General commended how updates to the Scheme were made available on the Treasury’s website and how information was communicated to Parliament (OAG 2011).

In its October 12, 2008, announcement, the government said that it would provide unlimited coverage to depositors. On October 22, 2008, it announced a cap of NZD 1 million per person in line with a cap of AUD 1 million that it expected the Australian Government to announce; two days later, the Australians did set a cap, but they also continued to offer unlimited deposit coverage for a fee (Reserve Bank 2008b; OAG 2011; Treasury 2008a).

On October 12, 2010, the government lowered the cap to NZD 500,000 for bank accounts and NZD 250,000 for nonbank accounts (OAG 2011).

The Scheme was funded by fees charged to participating institutions (Reserve Bank 2008b). The Scheme collected NZD 237 million in fees (OAG 2011). The Scheme, though, was forced to pay NZD 1.9 billion in claims, which was covered by the Treasury (OAG 2011; Makhlouf 2010). The Scheme expected to collect NZD 1.1 billion from receiverships. To cover the expected loss, the Treasury set aside NZD 831 million in its fiscal budget for the year ended June 30, 2009 (Treasury 2009d). The Scheme had collected NZD 237 million in fees as of June 30, 2010 (Makhlouf 2010; OAG 2011). The Scheme was not intended to minimize the Crown’s liabilities (OAG 2011).

Only deposit-taking institutions were eligible for the Scheme (Reserve Bank 2008d). Eligible institutions needed to be New Zealand-registered banks and nonbank deposit-taking financial institutions, which were fully compliant with the requirements of their trust deeds (Reserve Bank 2008c).^FN“Trust deeds” refers to the fact that New Zealand’s regulatory framework was based primarily on “a trustee supervisory model under which an NBDT appoints a trustee corporation or person approved for the purpose” (OAG 2011). According to this model, the nonbank deposit-taking institutions (NBDTs) would agree to a trust deed, which set out requirements that the institution needed to meet (OAG 2011). The trustee was meant to supervise and enforce the institution’s compliance with the terms of the trust deed (OAG 2011). The trustee could also place the institution into receivership if this was a term of the trust deed (OAG 2011). This included finance companies or companies that are oftentimes involved in diverse forms of lending such as “motor vehicle and vendor finance, property development, and commercial and consumer finance” (OAG 2011). Nonbank deposit-taking institutions were also subject to a different regulatory and supervisory framework, when compared to banks (OAG 2011). Nine eligible institutions failed under the Scheme, all of them finance companies (OAG 2011). The Crown Retail Deposit Scheme Act of 2009 further specified the criteria for eligible institutions (English 2009).

The Scheme had different eligibility criteria for different types of institutions. It had five different guarantee deeds: for registered banks; building societies and credit unions; and three separate nonbank deposit-taking company guarantee deeds covering finance companies, cash collective investment schemes, and unit trust collective investment schemes (OAG 2011; Reserve Bank 2009a; Reserve Bank 2009b).

To participate in the Scheme, institutions were required to submit an application (OAG 2011). The application included a profile of an institution’s financial services, the value of outstanding debt securities, and copies of the institution’s latest annual report, prospectus, and investment statement (Treasury 2010b). The Treasury would then determine whether an institution was eligible for the Scheme (OAG 2011). The application process led to some confusion, as institutions were unclear about “other factors,” which the Treasury considered in their decision to extend the guarantee (OAG 2011).

The Crown Retail Deposit Guarantee Scheme Act of 2009 further clarified the eligibility criteria for the Scheme, while also extending the Scheme and altering its fees (CRDGS Act 2009, pt. 2[5][1-3]; English 2009). Notably, the Act allowed the Minister of Finance to specify eligibility criteria, like compliance with trust deeds and meeting the Reserve Bank’s prudential requirements (OAG 2011). Collective investment schemes were no longer eligible. The criteria also required eligible institutions to have a credit rating of BB or better.

At its peak, the Scheme covered 96 institutions (OAG 2011). Sixty of these were nonbank deposit-taking institutions, 12 were banks, and 24 were collective investment schemes (OAG 2011). Figure 4 summarizes the number of institutions who applied over the Scheme’s lifetime and whether they were approved, rejected, or withdrawn.

Source: OAG 2011, 85.

The Scheme covered all deposits for registered banks (Reserve Bank 2008c). For nonbank deposit-taking institutions, the Scheme only covered the deposits of New Zealand citizens and tax residents (Reserve Bank 2008c). The Treasury decided to insure nonbanks because they believed that excluding nonbanks would prompt depositors to migrate their funds to banks (OAG 2011). The Treasury held that this migration might cause a failure in nonbank deposit-taking institutions (OAG 2011). To abate this fear, the Scheme covered nonbank deposit-taking institutions that were viewed as riskier (OAG 2011). Moreover, the Scheme covered interest accrued on insured accounts for failures that occurred prior to October 12, 2010 (OAG 2011). At first, the Scheme also covered collective investment schemes, or investment products where a manager invests money on behalf of many investors (OAG 2011).

From October 12, 2008, to October 12, 2010, the Scheme was free for eligible institutions with total retail deposits under NZD 5 billion (Reserve Bank 2008d). For institutions with over NZD 5 billion of total retail deposits, the Treasury charged 10 basis points on an institution’s total retail deposits over NZD 5 billion (Reserve Bank 2008c). After October 12, 2010, fees for the Scheme became risk-based, depending on factors like an institution’s outstanding debt securities, prospectus, investment statement, and compliance with prudential requirements (OAG 2011). Fees also differed depending on the type of institution that was insured, with nonbank deposit-taking institutions paying a higher fee to reflect their riskiness and to reduce market distortion (OAG 2011). The Treasury adopted risk-based fees because it believed that this would reduce market distortion, favor lower-risk institutions, and encourage institutions to opt out of the Scheme (OAG 2011). For more details on these fees, see Appendix 1.

The Treasury also reserved the right to impose a “new business” fee (OAG 2011). This was a risk-based fee, determined by an institution’s credit rating, that applied to institutions whose balances grew by more than 10% per year (OAG 2011; Treasury 2008a).

On October 22, 2008, the Treasury announced a 300-basis-point fee paid by nonbank deposit-taking institutions that were rated below a BB or were unrated (Treasury 2008a). As an incentive to increase their credit rating, institutions that achieved a BB rating or above during the duration of the Scheme would be eligible for a rebate, which would give an effective fee of 100 basis points for the period that an institution was below a BB (Treasury 2008a).

If an institution were to fail, the Treasury was required to inform the Minister of Finance and his press secretary, who would communicate the failure to Parliament and to any members of Parliament whose constituency was concentrated in the failed institution (OAG 2011).

In the case where a participating institution failed, the Treasury would pay out the institution’s deposit liabilities, including interest accrued on insured accounts (Reserve Bank 2008c; OAG 2011). Then, the Treasury would liquidate the institution’s assets, with proceeds from the Treasury’s receivership reimbursing the Scheme (Makhlouf 2010; OAG 2011). The Treasury also had the power to withdraw its guarantee at any time (OAG 2011). The Treasury withdrew its guarantee three times. One of these institutions, Viaduct Capital, later failed. In that case, the Treasury initially paid deposits made prior to the withdrawal of the guarantee (OAG 2011).

New Zealand’s Auditor-General report found that the Treasury was largely unprepared to exercise the guarantee—only planning for the payout process a week before the Scheme’s first failure (OAG 2011). This unpreparedness, though, allowed the Treasury to establish a “robust and scalable” payout system (OAG 2011). Ultimately, this led the Treasury to adopt an outsourcing arrangement to process claims (OAG 2011). The Treasury maintained oversight over the outsourced payment-processing system (OAG 2011).

The Treasury could only execute the Scheme once an institution failed, not if the Treasury suspected that an institution would fail (OAG 2011). The Treasury believed that executing the Scheme once an institution failed was “more desirable and less costly than intervening before a failure” (OAG 2011).

This was the case with South Canterbury Finance, the largest institution to fail under the Scheme (OAG 2011). The Treasury, in this case, had ample warning about South Canterbury’s impending failure, leading the Treasury to examine different payout methods (OAG 2011). In the case of South Canterbury Finance, the Treasury paid all depositors, regardless of eligibility criteria, due to the administrative task of determining eligibility for such a large institution and concerns about the interest that would accrue as payments were processed. The Treasury also paid other creditors of South Canterbury Finance whose claims ranked higher than depositors (OAG 2011).

Ultimately, the decision to pay out all depositors, even ineligible depositors, was also extended to institutions that had failed prior to South Canterbury Finance (OAG 2011).

Through the Scheme, the Treasury had expanded powers, including the ability to request information from participating institutions and to withdraw its guarantee (OAG 2011).

The government imposed additional restrictions on nonbank deposit-takers participating in the guarantee, including restrictions on distributions to shareholders; assurance that their business dealings were on arm’s-length terms; and the government’s ability to appoint an inspector (Treasury 2009d).

Originally, the Scheme was intended to last two years, until October 12, 2010—a period during which the government planned to “see how well international financial markets [stabilized]” (Reserve Bank 2008d). However, in order to maintain public confidence in the New Zealand banking and financial system, to minimize market distortions, and to minimize costs, the Scheme was extended in 2009 (Treasury 2009b; CRDGS Act 2009, pt. 2[6][1]). The Scheme was then scheduled to end on December 31, 2011 (CRDGS Act 2009, pt. 2[6][1]). Many institutions opted out of the Scheme because of its costs, because such institutions were doing well, or because they no longer met the revised criteria, particularly the minimum BB credit rating (OAG 2011). Only eight institutions participated in the Extended Scheme (OAG 2011). The Scheme ended as scheduled on December 31, 2011 (Treasury 2012).

As of mid-2022, New Zealand was working to create a standing deposit insurance scheme, which would guarantee NZD 100,000, or 93% of depositors (Robertson 2021). New Zealand authorities hoped to have the scheme operational in 2023 (Robertson 2021).