When most people deposit money at the bank, they believe they’re putting it somewhere safe. By and large, this is true: of all the places to store savings, banks rank as one of the safest. 

But bank depositors aren’t as safe as depositors think — a neat fact that allows banks to use billions of dollars of depositors’ funds to finance themselves at a cheaper rate than they might otherwise be able.

The perception and reality of risk have been thrown into relief by two concurrent reviews; Phase II of the Reserve Bank Act review and the Reserve Bank’s bank capital requirements review, which could radically change how much protection depositors receive in New Zealand.

The RBA review could recommend a form of deposit protection, meaning deposits would be more protected in the event of a bank collapse. And the capital review could force banks to hold more capital relative to the lending they do, making a bank collapse less likely.

Banks funded at a discount

Banks draw funding from multiple sources. Depositors place their money in the bank, banks issue debt to investors in the form of bonds, and they sell shares to investors who wish to own part of the company. 

In a perfect economy, the interest paid to depositors and bondholders would reflect the level of risk that each took on.

Depositors, for example, would be paid less interest than bondholders because depositing money in a bank would be safer than investing in a bank’s bonds. 

In fact, in most countries this is the case — but not in New Zealand. 

In the absence of deposit insurance, depositors in New Zealand face more or less the same level of risk as bondholders. The difference between interest paid to depositors and the coupon paid to bondholders is a reflection of a perceived difference in risk — a perception that is more or less false. 

Depositors at the major banks have been hit by historically low interest rates, making life difficult for savers. Interest rates on savings accounts at major banks are roughly 2 percent. 

But bondholders enjoy interest rates nearly double those afforded to depositors. ANZ, the country’s largest bank last issued a bond to both retail and wholesale investors in May 2018. The 5-year fixed-rate bond had a 3.70 percent coupon (interest rate), far in excess of the 2 percent offered to ANZ’s depositors using its “serious saver account”.

A spokesperson said that bonds and bank carried the same “rank”, meaning they would repaid at the same time, before subordinated bonds, equity and shares were repaid. 

The spokesperson for the bank said that bank bonds were issued for longer periods than deposits, accounting for the higher rates. 

“In general, bank bonds are issued for longer periods of time than deposits,”

“Typically, bank bonds are issued for periods of three years and longer (seven to10 years), although from time to time they are issued for shorter periods.”

“Generally, longer-term interest rates are higher than shorter-term interest rates (although there have been periods in the past when the opposite was true). So, again generally, the interest rate on bonds will tend to be higher than the rate on deposits,” they said. 

ANZ is not alone. Last November, BNZ conducted a $550,000,000 five-year bond issue, at 3.68 percent, far higher than the 2.10 percent rate offered on savings accounts. BNZ will pay roughly $20.2 million to investors who purchased those bonds, almost double the rate it would pay on a similar amount of deposits, $11.5 million.  

The major banks currently offer nine month term deposit rates at between 3.2 and 3.4 percent interest.

An appetite to change? 

The Reserve Bank Act Review is currently looking at whether to include some form of deposit protection in legislation that would likely be passed in 2020. 

There is no indication of what such a scheme would look like yet, but it could take the form of a preferential scheme, whereby depositors were paid out before other creditors, or an insurance scheme.

But this could cost banks more at a time when the Reserve Bank could also be asking them to take on extra capital as part of its capital requirements review.

Finance Minister Grant Robertson, who will receive the recommendations from the review in advance of any decision to legislate said he was looking at deposit protection in the context of the capital requirements proposals made by the Reserve Bank, likely to come into force this year.

Robertson told Newsroom that he would keep the bank capital review in mind when he looked at the Reserve Bank Act review.

“You’ve got to have a recognition of what each of them do and how they interact together,” he said.

“Certainly as we’re going through talking about the depositor protection possibilities we’re thinking about the capital requirements, I liken it to being a fence at the top of the cliff and an ambulance at the bottom – you’ve got to have a recognition of what each of them is doing,” he said. 

Opposition finance spokesperson Amy Adams cautioned that going too far in both directions could be overkill. While National did not have a formal policy, her personal view was that deposit protection was “worth exploring”.

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