Govt Introduces Risk-Based Levies for New Depositor Compensation Scheme

The DCS is designed to safeguard deposits up to $100,000 per depositor, per institution, in the event of a deposit taker's failure.


Devdiscourse News Desk | Wellington | Updated: 08-11-2024 12:04 IST | Created: 08-11-2024 12:04 IST
Govt Introduces Risk-Based Levies for New Depositor Compensation Scheme
The levies collected from institutions will accumulate in a dedicated DCS fund, managed by the Reserve Bank of New Zealand. Image Credit:
  • Country:
  • New Zealand

Finance Minister Nicola Willis announced that New Zealand’s new Depositor Compensation Scheme (DCS) will adopt a risk-based levy structure for banks, credit unions, building societies, and finance companies, reflecting each institution's size and risk profile. The DCS is designed to safeguard deposits up to $100,000 per depositor, per institution, in the event of a deposit taker's failure.

"Through a targeted, risk-based approach, the DCS will ensure that higher-risk institutions contribute proportionally, while supporting the financial stability of smaller entities," said Ms. Willis. This structure is intended to balance fair contribution with financial soundness across the sector. Key Elements of the DCS Levy Framework:

Risk-Based Levy for Large Institutions: The levy will be calculated based on each institution's deposits, with the four largest banks collectively covering approximately 75% of the total levy. This distribution reflects both their size and potential impact on the DCS.

Temporary Flat Levy for Smaller Institutions: Smaller deposit takers, including credit unions and building societies, will initially pay a flat levy until 2028, when the new prudential regulatory framework is fully established. Ms. Willis cited the Commerce Commission’s recommendation, stating, “We recognize the importance of avoiding undue burden on smaller entities during this period of regulatory change.”

DCS to Boost Competition and Consumer Confidence: The DCS aims to promote competition by providing greater confidence to depositors. Protected deposits encourage consumers to explore diverse financial providers, knowing their deposits are safeguarded if a deposit taker fails.

Monitoring and Future Adjustments: Ms. Willis confirmed ongoing oversight of the DCS's impact on market competition. She noted that, if necessary, legislative adjustments could be made to strengthen the scheme’s support for a competitive financial ecosystem.

Scope and Administration

The DCS will cover a range of retail deposits, including savings accounts, current accounts, and term deposits. Deposit takers will clearly indicate which products fall under the scheme on their websites, ensuring transparency for depositors.

The levies collected from institutions will accumulate in a dedicated DCS fund, managed by the Reserve Bank of New Zealand. This fund will provide a readily accessible pool for compensation, enhancing the resilience of New Zealand’s financial safety net.

Ms. Willis reiterated the government’s commitment to fostering stability and growth within the banking sector, ensuring that the DCS not only protects depositors but also supports a robust and competitive financial market.

Give Feedback