The deposit compensation scheme; Is it worth the hype?
As the launch of the Deposit Compensation Scheme in New Zealand draws near (1 July 2025), I’m sensing a growing expectation that it could be a big win for savers. I really hope it is. But I have my doubts.
Described by the Reserve Bank as a way to increase trust and security in the financial system, you’d be forgiven for thinking “Great! We can always use a bit of that.”
But rather than taking this purely at face value, I thought it might be worth a quick look at what the Scheme involves, who will benefit, and who is likely pay for it.
Overview of the Scheme
Once in effect, the Scheme promises to protect deposits up to $100,000 per customer, per deposit taker – which include both banks and non-bank deposit takers (NBDTs).
A customer can be an individual, a trust or a limited liability company. The scheme covers transaction, savings, notice, and term deposit accounts.
Benefits for Savers:
The Scheme will likely provide a boost to the security of a qualifying deposit held at the riskier credit unions, building societies and finance companies. As to if this will make those institutions more trustworthy overall, that’s up to you to decide.
But what about the other 80% of deposits that sit with one of the ‘Big 4’ Australian-owned banks? Those banks already have good credit quality and low risk of failure. What’s more, they're way too big for the Scheme to backstop anyway - given it is expected to take about 20 years for the size of the Scheme to grow to just 1% of deposits in the system.
Therefore, it stands to reason most New Zealanders will not see much, if any, benefit from the increased trust and security the Scheme promises.
Potential Drawbacks:
To build up the size of the Scheme, participating deposit takers will be charged a levy. Which seems fair, given the Scheme is designed to make deposits safer.
Because of this, it seems logical to expect deposit takers, especially the riskier ones, will be able to lower the interest rates they must pay to attract deposits – as the interest rates they pay on their accounts, in part, reflect the risk associated with lending your money to that institution.
Therefore, the proposition for those considering moving their savings to a NBDT once the Scheme is in place looks to be this:
Accept a lower interest rate than is currently offered by that institution in return for the added security the Scheme will likely bring. While those that stick with saving through a ‘Big 4’ bank, for example, will likely see no discernible difference in the safety of their deposit.
But, in just the same way as interest rates on savings accounts at NBDTs will likely fall, those saving through the big banks will almost certainly still have to accept lower interest rates too.
This is because of the lack of competition in our savings market. Which makes it very easy for the ‘Big 4’ to simply pass the cost of the Scheme's levy on to their customers.
