Questions and answers - Deposit Takers Act

What was the background for the Deposit Takers Act?

In November 2017, the Minister of Finance Grant Robertson announced a review of the Reserve Bank of New Zealand Act 1989 (the Review). 

Much had changed in the 30 years since the Act was first passed — both in the international financial environment and with financial system regulation. The goal of the Review was to modernise:

• New Zealand’s monetary and financial stability policy frameworks

• the Reserve Bank’s governance and accountability settings. 

The first actions as a result of the Review updated the monetary policy framework including:

• adding supporting maximum sustainable employment to the economic objectives for the Reserve Bank

• creating a Monetary Policy Committee (MPC) with responsibility for formulating monetary policy.

This was enacted in 2018 by the Reserve Bank of New Zealand (Monetary Policy) Amendment Act.

The second tranche of work updated the Reserve Bank’s financial stability role and broader governance arrangements when the Reserve Bank of New Zealand Act 2021 (the 2021 Act) passed into law in August 2021. Our previous legislation, the Reserve Bank of New Zealand Act 1989 was more than 30 years old. The new Act aims to modernise how we operate and are governed. It increases our accountability and transparency and brings us closer to what is required of Crown entities in terms of decision-making, reporting and external monitoring.

The final piece of legislation is the Deposit Takers Act (DTA) which:

• protects depositors’ money

• increases the overall stability of our financial system by creating a Depositor Compensation Scheme (DCS)

• strengthens the Reserve Bank’s supervision and enforcement powers with the aim of enabling action before any entity is under inappropriate stress or at risk of failure.

More information about the Reserve Bank of New Zealand Act 2021

Review of the Reserve Bank Act | treasury.govt.nz

Who conducted the Review?

A joint Treasury and Reserve Bank team undertook the Review, with governance from a steering committee co-chaired by the Treasury and the Reserve Bank.

An Independent Expert Advisory Panel (the Panel) advised on key issues to support the work of the Review team and the steering committee.

Find out more information about the Independent Expert Advisory Panel | treasury.govt.nz

What steps were taken to develop the DTA?

The Deposit Takers Bill was introduced to Parliament on 22 September 2022 and the Deposit Takers Act received Royal Assent on 6 July 2023.

This follows the Finance and Expenditure Committee's consideration of the Bill. This material can be found on the New Zealand Parliament website.

Read a copy of the Deposit Takers Act | legislation.govt.nz

An exposure draft of the Deposit Takers Bill was released on 6 December 2021, with the deadline for submissions closing 21 February 2022. As part of the submission process, we ran workshops with banks and Non-Bank Deposit Takers (NBDTs) and met with several firms to address their queries on the Bill.

Read a summary of submissions

We have also published submissions in full with the exception of one submission where the submitter requested the submission be withheld. Alongside submissions, we have also published a suite of documents that support the introduction of the Bill. 

Find out more about the submissions made on the exposure draft

On 19 April 2021, Cabinet agreed to a set of recommendations that designed a new prudential framework for deposit taking institutions alongside a strengthened crisis management regime and depositor compensation. You can find further details on these decisions in the proactive release of materials on the Treasury website. Later in October 2021 and June 2022 Cabinet took further decisions regarding more details of the Act. 

Significant changes that were made to the Deposit Takers Bill following consultation on the exposure draft are outlined in the Regulatory Impact Statement, which can be found on the Reserve Bank website.

Read the Cabinet papers and Regulatory Impact Statement 

Proactive releases | treasury.govt.nz

Why is the depositor compensation limit set at $100,000 per depositor, per deposit taker?

During public consultation, we received feedback that the proposed $50,000 coverage limit was low. Small deposit takers — such as small banks, credit unions, building societies and finance companies submitted that the lower limit posed a threat to their stability and liquidity. This could prompt some depositors to shift uninsured funds — amounts above the coverage limit — to the large banks — given the perceived greater stability of the large banks. The higher coverage limit addresses these concerns by:

• providing greater coverage for New Zealand depositors

• supporting public confidence

• enhancing the credibility of resolution tools.

Some stakeholders supported a significantly higher limit more in line with the Australian limit of AUD $250,000. However, a limit of this size would be less consistent with the rationale of the Depositor Compensation Scheme to protect ordinary New Zealand depositors — only a small percentage of depositors have deposits over $100,000, and would have questionable impacts on long-run financial stability.

How will the risks associated with moral hazard be addressed in the Depositor Compensation Scheme?

Moral hazard arises when people are protected from the consequences of their risky behaviour. When a depositor compensation scheme is introduced, depositors may take less care when assessing the risks associated with their money, and regulated entities may take less care with depositors’ money. 

Moral hazard risk will be, to an extent, mitigated through the calibration of the Reserve Bank's regulatory policy and supervisory approach, and potentially through charging levies that are proportional to the risk posed by deposit takers. Holders of uninsured deposits will continue to have incentives to monitor risk.

What are the costs of the Depositor Compensation Scheme and who bears these costs?

The Depositor Compensation Scheme could face compensation payouts in the event of deposit taker failures occurring and will have ongoing operational expenses. These costs will be covered over time by levies charged to deposit takers. Depending on decisions made by individual deposit takers, it is possible these costs could be passed on to customers. Deposit takers may also need to upgrade their systems to implement the scheme and to ensure that depositors can be promptly compensated.

How is the Depositor Compensation Scheme funded?

Under the DTA, the Depositor Compensation Scheme will be fully funded by levies on licensed deposit takers. The scheme will also be supported by a Crown funding backstop, which will act as a temporary source of funding for the scheme if it does not have sufficient funds to meet its obligations. Any funds provided by the Crown under the scheme will be recovered from the industry over time through levies. 

The Minister of Finance will set the funding approach through the Statement of Funding Approach to be published at least every 5 years. The Statement of Funding Approach and the Levy Regulations will involve public consultation.

When will the Depositor Compensation Scheme be introduced?

The target timeframe for the scheme to go live is late 2024. The implementation of the scheme has been prioritised so that depositors can have confidence that their funds are protected as soon as possible.

What are the governance and institutional arrangements for the Depositor Compensation Scheme?

The objective of the scheme is to protect depositors to the extent they are covered by the Depositor Compensation Scheme and so that they contribute to financial stability.

The Reserve Bank’s function is to manage and administer the scheme. This includes:

• making sure depositors are compensated promptly after a specified event

• duties to collect and manage levies

• monitor risks to the scheme

• raise public awareness.

What type of products and depositors are eligible for coverage by the Depositor Compensation Scheme?

The scheme covers transactional, savings and term deposits currently offered by registered banks, and the equivalent products offered by non-bank deposit takers. These products are widely held by everyday New Zealanders and are more likely than other products to destabilise the financial system if they are subject to strong demand for cash – or a ‘run’ by their depositors. 

A clear and consistent boundary is defined between these protected deposits and other debt securities — tradable fixed interest securities such as debentures, bonds, and notes will not be protected. Excluding these other types of debt securities from the Depositor Compensation Scheme allows for the continued existence of higher risk and return debt products that can be offered to retail investors.

Coverage for the scheme applies on a per depositor, per institution basis. In a compensation payout scenario, amounts held in joint accounts at a single institution will be split equally across account holders and count towards eligible deposits, up to the coverage limit for each depositor at that institution. Financial institutions, related parties of the Depositor Compensation Scheme, members and government bodies are not eligible for scheme coverage.

In order to support the durability of the legislative boundary over time, the Minister of Finance is able to bring products within the scope of the scheme through regulations provided that they are substantially the same as other products covered by the scheme. The Minister also has the power to define detailed eligibility rules through regulations. 

What is the process for giving depositors their money in the event of a failure?

The Reserve Bank has responsibility to ensure people are promptly compensated, up to the protection limits, in the event of failure. One option for the provision of compensation will be to make compensation entitlements available as deposits at another deposit taker.

Under a compensation situation, how are DCS entitlements calculated?

I have several accounts with a bank — does the DCS treat them all separately?

The DCS provides compensation based on the total dollar amount of protected deposits each depositor has at a given deposit taker.  Only the total dollar amount of protected deposits matters, not the number of accounts involved.  The compensation limit of $100,000, per depositor, per institution, applies whether the depositor holds one account, or many.

For example, Tyla has three accounts with Bank X, a transaction account with the balance of $2,000, a saving account with the balance of $20,000, and a term deposit of $80,000.  If Bank X fails, the maximum amount of DCS compensation she could be entitled to is $100,000.  The compensation limit of $100,000 would apply to the accounts in aggregate, not to the accounts separately.


I have a joint account with my spouse, how is this treated?

Where people hold a deposit jointly, for DCS purposes each person is treated as having an equal share (unless non-equal shares had been agreed and documented by the bank before a payout event occurs).

For example, Stacey holds a deposit account jointly with her spouse Mike at Bank Y, and the balance of the joint account is $100,000. Stacey also holds another deposit account on her own name with Bank Y and the balance is $20,000.  In the event of failure of Bank Y, Stacey is entitled to DCS compensation up to $70,000.  This is calculated as a $50,000 equal share of the joint account, plus $20,000 in regard to her own account.

Why was the regulatory regime for banks and non-bank deposit takers combined?

A single regime supports a more coherent approach across the banking and non-bank deposit taking (NBDT) sectors so that similar firms and activities are regulated with proportionality, where possible.

This brings New Zealand’s framework into line with similar models in most other jurisdictions. 

What types of entity are subject to prudential regulation and supervision?

Under the DTA, prudential regulation and supervision applies to firms that are in the business of borrowing and lending unless they are specifically excluded from the regime. This includes banks, credit unions, building societies, and finance companies. The Reserve Bank will establish a policy on which deposit takers can call themselves banks.

Wholesale funded lenders are not expected to be required to be licensed under the new regime, for example those that solely borrow by raising funds on wholesale capital markets. However, the Reserve Bank will be able to collect information and set lending standards for prescribed categories of non-deposit taking lenders. 

How are small deposit takers treated within the regulatory regime?

The prudential framework has the required flexibility to accommodate the full range of deposit taking institutions, from very small non-bank deposit takers (NBDTs) to the largest banks. For example, the Reserve Bank is able to calibrate regulatory settings for different classes of deposit taker. The framework also provides discretion for the Reserve Bank to impose institution-specific requirements to reflect the underlying risk profile of that institution (supervisory adjustment). When exercising its powers under the DTA, the Reserve Bank needs to take account of certain principles that recognise (amongst other things) the importance of maintaining competition, preserving diversity in the deposit taking sector, and the desirability of taking a proportionate approach to regulation and supervision. In relation to the proportionality principle, the Reserve Bank must prepare and publish a proportionality framework when developing standards. 

How are finance companies regulated under the new regime?

Finance companies that borrow from retail investors continue to be prudentially regulated and are required to be licensed as deposit takers. Prudential standards, Reserve Bank supervision, and risk-based deposit levies will seek to mitigate any risks if finance companies seek to issue products eligible for depositor compensation.

How do the DTA’s purposes and decision-making principles guide the exercise of powers and duties?

The purpose clauses sets out the way the Bank intends to protect and promote the stability of New Zealand’s financial system. The purpose statement explains why the legislation was enacted, while the substantive provisions in the Act provide for what is required. In doing so, it shapes how the legislation is interpreted when there is uncertainty and the way in which the functions and powers provided for under the DTA are exercised.

A set of decision-making principles also provides an opportunity to bring in a range of other considerations for the exercise of the powers in the DTA.

What about efficiency?

The Bank must have regard to the need to avoid unnecessary compliance costs.

Why are standards the primary tool for imposing prudential requirements on deposit takers?

This model recognises that prudential requirements are often of a legislative character by establishing legally binding obligations for all deposit takers, or classes of deposit takers in contrast to non-binding guidance a regulator may choose to issue and provide a more robust statutory framework for setting prudential requirements. More specifically, once the relevant provisions are in force, it will replace Conditions of Registration (CoRs), which define most of the rules that registered banks must adhere to in order to operate in New Zealand, with standards, which are a form of delegated legislation. Standards set by the Reserve Bank are classified as secondary legislation under the Legislation Act 2019, which means they will be subject to parliamentary oversight and potential disallowance via the Regulations Review Committee.

This approach maintains the Reserve Bank’s operational independence in setting prudential rules (in line with international best practice), while providing a greater degree of transparency and oversight than the current approach, which primarily uses CoRs.

What is the scope of areas in which the Reserve Bank can issue standards?

Standards issued under the DTA can cover a range of matters currently provided for via Conditions of Registration (CoRs), but with more clarity where required — for example, the addition of liquidity requirements and lending standards, which were formerly provided for under the broader heading of risk management systems and policies. The scope of standards is also intended to be broad enough to enable the Reserve Bank to set standards in relation to the full range of matters covered by the Basel Committee on Banking Supervision’s Core Principles, should it choose to do so.

The specified matters standards may relate to are set out in the DTA and may be extended via regulations. This approach aims to provide a balance between clarity on the scope of the powers being delegated to the Reserve Bank and the flexibility for these powers to be adjusted in future to accommodate new developments.

How does the Reserve Bank set prudential requirements that affect a regulated entity’s ability to lend?

The types of lending that lending standards may apply to (for example, residential property, agricultural) are prescribed by regulations, leaving the types of borrowers and the types of macro prudential instruments used to be set by the Reserve Bank in the standards. Empowering the Reserve Bank to set lending standards that define specific tools is important in supporting the Reserve Bank’s operational independence in setting macro-prudential policy.

What is the role of the Minister of Finance in changing the scope of lending standards?

The DTA provides that the Minister of Finance can make regulations (following consultation with the Reserve Bank) defining the type of lending that lending standards may relate to. This reflects the legitimate interest of elected representatives in setting the permitted scope of this power given the potentially significant distributional effects it may have, and the potential tensions between the Reserve Bank setting lending restrictions to achieve its financial stability objective and wider governmental objectives.

What is the process for licensing deposit takers?

All regulated entities need to obtain a licence from the Reserve Bank to undertake the business of borrowing and lending. The DTA sets out the relevant criteria for licensing a potential applicant, as well as the specific process requirements. The Reserve Bank has powers to establish licensing conditions, specific to licensed deposit takers. 

Licensing criteria include fit and proper requirements for directors and senior managers of deposit takers. Fit and proper requirements are designed to help ensure that directors and senior management have the requisite skills, experience and integrity to perform their roles. The framework for fit and proper requirements and procedural protections in the DTA is along the lines of that for insurers under the Insurance (Prudential Supervision) Act 2010, with some of the detail of the requirements specified in standards.

This approach helps ensure the Reserve Bank can flexibly manage the risks presented by particular entities. In addition, it ensures there are effective due process requirements around licensing decisions and decisions to impose conditions (including appeal rights in certain cases).

How does the DTA improve deposit takers’ assurance to both the Reserve Bank and other external stakeholders that they are prudently managing risks?

The DTA imposes on directors of licensed deposit takers a positive and on-going duty to ensure there are adequate systems, processes and policies in place to ensure the entity complies with its obligations. There are pecuniary penalties for breaches of this duty by directors, subject to appropriate defences. In addition, directors are able to take out personal insurance against the potential penalty for such breaches. Directors of licensed deposit takers may also be liable for a penalty if false or misleading information is given to the Reserve Bank or publicly disclosed by a deposit taker.

What changes does the DTA make to the Reserve Bank’s supervisory and enforcement functions?

New supervision and enforcement powers under the DTA will strengthen the Reserve Bank’s ability to act before a financial institution is in trouble. This provides more protections for depositers and increases the stability of the financial system.

Why has New Zealand’s legislative framework for bank crisis management changed?

Crisis management is a key part of the regulatory system’s financial safety net, along with prudential regulation and supervision, a central bank’s ability to supply liquidity to the system, and depositor protection. 

New Zealand’s legislative framework for bank crisis management, being largely based on statutory management, had not been meaningfully reviewed since the late 1980s. Under this framework, the Reserve Bank developed the Open Bank Resolution (OBR) policy to manage the failure of a large bank. The DTA reforms have been informed by international experience and subsequent post-global financial crisis (GFC) reforms. It was therefore considered timely to consider possible enhancements to New Zealand’s framework.

How is fiscal risk to public funds managed?

The DTA provides the Minister of Finance with the ability to direct the Reserve Bank on the management of risks to public funds in a resolution.

In other words, the Minister is able to direct the Reserve Bank to take an action in the course of a resolution provided that it is for the purpose of managing risks to public funds. The intention is that the Minister’s direction power is a residual lever only, to enable the Minister to manage risks to public funds if necessary. It should not be used for day-to-day intervention in a resolution. 

Why were changes needed to the Public Finance Act 1989?

The DTA addresses a long-standing gap in the government’s financial crisis management framework by amending the Public Finance Act 1989 to authorise the Minister of Finance to approve expenditure in a financial crisis whether or not there is an appropriation in place. This authority is similar to the existing authority to incur expenditure in a civil defence or health emergency. The authority has several conditions attached to ensure that it does not raise expectations of taxpayer bailouts and will only be used as a last resort to maintain the stability of the financial system and the continuity of critical financial services when all other options were unlikely to succeed or not in the public interest.

What are the next steps for implementation of the Deposit Takers Act?

The Deposit Takers Bill was introduced to Parliament on 22 September 2022, and the Deposit Takers Act received Royal Assent on 6 July 2023.

There is a substantial work programme to implement the new prudential framework for deposit takers. It will take some years for the Reserve Bank to develop and consult on the secondary legislation that will implement the regulatory requirements for the new regime, and complete a licensing process for deposit takers to operate under the regime. The parts of the current Reserve Bank Act relating to the regulation and supervision of registered banks and the Non-bank Deposit Takers Act 2013 will remain in force until the remaining parts of the DTA have been fully implemented.

The Depositor Compensation Scheme provisions of the Act are intended to be in place late 2024, before the rest of the DTA.