Non-banks may offer lower rates under deposit insurance scheme

A soon-to-be-introduced deposit insurance scheme – one of the largest changes to New Zealand’s financial system in some time – will offer greater protection to Kiwi investors, but could see deposit interest rates fall significantly, according to a new report.

Tuesday, April 15th 2025, 8:22AM

Administered by the Reserve Bank of New Zealand, the Deposit Compensation Scheme (DCS) is a formal, government-backed guarantee of deposits in New Zealand banks and other licensed deposit taking institutions. The scheme, expected to be introduced in July this year, will provide ‘deposit insurance’ for up to $100,000 per depositor, per institution.

Professor David Tripe, director of Gold Band Finance (GBF), says the DCS will be a major change for the New Zealand financial system.

“Most depositors will no longer have to be worried about the quality, and safety in particular, of the institution with which their funds are lodged,” says Professor Tripe.

“Having deposit guarantees of this type is generally good for a country’s financial stability, although the design of some countries’ systems is better for promoting financial stability than others.”

New Zealand is relatively late in adopting a deposit insurance system. Over 110 countries around the world have introduced deposit guarantee systems, since the first was adopted in the United States in 1934. Such schemes are almost always underwritten by national governments, which gives additional certainty to depositors and reduces the likelihood of a ‘run on the banks’ in the event of failure of one of more financial institutions.

While good for overall financial stability and security, Professor Tripe says some changes are expected in New Zealand following on from the scheme’s introduction – most notably in the interest rates organisations will need to offer to attract investors.

“The extra amount that the relevant finance companies and other non-bank deposit takers have to pay to attract deposits will be reduced, as depositors will no longer be subject to the same risk of loss,” says Professor Tripe.

“It is likely that clients of the non-bank deposit takers will still earn a premium, because they are not as well known in the market as the major banks, but it will no longer be as much.”

Professor Tripe has demonstrated those likely impacts in a new report on the impacts of the DCS scheme. Looking at the temporary introduction of a deposit guarantee in the wake of the Global Financial Crisis in New Zealand, the spread between interest rates offered between major banks and finance companies fell dramatically, before settling at around 0.5%.

Professor Tripe says with amounts greater than $100,000 only be insured up to that limit, a change in deposit rates for amounts greater than $100,000, isn’t expected, based on international experience.

“We also don’t expect that the higher fees paid by riskier institutions will cause those institutions to lower their deposit interest rates.”

Depositors won’t have to do anything in response to the scheme’s introduction: their deposits will be covered up to that $100,000 limit when it is introduced.

“They will, however, have the opportunity to switch some of their funds to another guaranteed institution, particularly if that institution is offering a higher interest rate,” says Professor Tripe.

“One of the challenges banks and other deposit takers will face is their degree of preparedness for opening accounts for new depositors, especially with the constraints imposed upon them by anti money-laundering rules.”

“Because there is limited prior experience, and because that experience was in a crisis period, there is considerable uncertainty about the impact of the new deposit guarantee scheme on the New Zealand deposit taking sector. However, I think it is reasonable to assume that it will lead to some closing of the spread that currently exists between institutions, and between the banks and the non-bank deposit takers in particular.”

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