Deposit Takers Bill

Members, we come now to Part 6. This is the debate on clauses 189 to 255, the depositor compensation scheme. The question is that Part 6 stand part.

Thank you very much, Madam Chair. Part 6 covers the creation of the depositor compensation scheme, and at the outset of this part I do just want to make a couple of introductory remarks. This is a very important part of this bill and a very significant change in New Zealand’s history. We are one of very few countries in the OECD that doesn’t have some form of depositor insurance or depositor compensation. Over a period of time through the consultation work that we did with the Reserve Bank Act review, we have traversed the support for this proposal across both the banking sector itself and the deposit-taking sector itself, and also among the public, and there has been a strong level of support.

It was interesting to note that at the beginning of the year, when we had some issues in the United States with Signature Bank and Silicon Valley Bank, my email bag started to fill up with people saying, “Where is the depositor compensation scheme up to?” My replies to all of those people has always been to stress that in New Zealand, we have a very strong and robust banking sector. All of the things that we’ve just been discussing in the previous parts of this bill are all about the things that sit around our banking sector and make sure that it is robust. You can’t set a bank up in New Zealand as easily as you can in some other jurisdictions, and when you do set a bank up, there are far more supervisory and enforcement provisions around that.

So New Zealand does have a sound banking system, but when the worst happens, we need to give confidence to our people that their money will be safe. Again, we know that in our history there have been times where there have been issues, and people have turned to the Government quite quickly to say, “Will you bail us out? Will you help us out?” What we need—and what became clear from the consultation that the public agreed with us on—was a scheme that meant that we didn’t have an ad hoc response in those situations, but we’d have a response that was always available, always there, and always giving confidence.

So Part 6 creates that scheme. Subpart 1 is the various preliminary provisions to set up the scheme. Subpart 2 establishes the Depositor Compensation Fund, which will be owned and managed by the Reserve Bank on behalf of the Crown. Under clause 198, the fund may be used for paying the depositor compensation scheme compensation, paying the Reserve Bank’s expenditure in connection with this scheme, supporting a resolution measure in relation to a licensed deposit taker, paying tax liabilities in respect of the Deposit Compensation Fund, and to repay any money borrowed by the Reserve Bank where there is a deficiency in the fund. Subpart 3 provides for how the compensation for eligible depositors will be calculated, and Subpart 4 sets out the Reserve Bank’s rights in relation to deposits when compensation is paid to eligible investors.

We have over the course of this bill gone a bit round the houses about what level of deposit should be covered, and, obviously, we’ve landed on the $100,000 protection. That will protect around 93 percent of deposits in New Zealand. It protects most people. If you think about it, it’s $100,000 in each deposit, so people could have a number of different deposits in different institutions that are covered. We felt that that struck a good balance. There are always issues with things like moral hazard here in making sure that we actually make sure that people take responsibility for their actions, but, equally, we’ll want to provide that level of protection to New Zealanders. Common schemes overseas—some of them have slightly higher levels of protection, but we think this is the appropriate balance level for New Zealand.

So this is a part of the bill that I think is extremely important, and one that I’m very proud to present to the committee.

Yeah, that was a useful introduction. I suppose I’m interested in the issue around the $100,000 and what it covered, and particularly in clause 191. As the Minister was aware, there’s a great deal of debate around whether a New Zealander holding currency deposits offshore should be covered or not, or, if an offshore entity has currency deposits sitting in New Zealand, whether those are covered. And it might be useful for the Minister, just to help anyone who is listening, as to whether which of those two are covered under the deposit scheme set out in here.

The other thing, clause 191(2) refers to “protected deposit” and does not include a debt security, and that’s a defined term at the front. But, again, it would be useful for the Minister just to identify whether that covers a debenture, a bond, a commercial paper, or any of those types of instruments, which in some cases could move into quasi-equity debt instruments, quasi-equity debt—mezzanine equity instruments is probably the better term to use. Which of those might be covered? Again, it would be very useful for the Minister just to help us all understand exactly what’s in and what’s out.

Yeah, thanks, Madam Chair. Just following on from that contribution, I’m interested in regards to Subpart 2 around the “Depositor Compensation Fund” and, in particular, if the Minister could provide some context in terms of the funding profile which will be funded through the levy and at which point the appropriateness, or the target fund value, will be reached, and over how many years, potentially, that will take in order to get to a point where the fund reaches a threshold which is deemed adequate for a stress event that may trigger that—acknowledging there’s quite a significant range in terms of what those events could look like. But is there any consideration around that point, and over what time period would that look like, and in the interim period, in the initiation phases of the bill and while that is building up, what the funding dynamic looks like. I guess, assuming that the Crown would write a cheque, but I just want clarity around that.

The other aspect, I know the Minister is very supportive of inflation adjustment, but there’s 100 grand that we refer to—was any consideration given around a mechanism to review and adjust, particularly around the inflation aspects? Because, you know, the reality is, if we’re standing here in five years’ time, what is appropriate, particularly under the current inflationary environment, will no doubt be higher than the current numbers in there. And just what, if any, consideration has been given to ensuring that the numbers within that keep pace with the economic reality that we face here in New Zealand?

Yeah, I’m just conscious that the Minister’s getting some advice, so I appreciate that. I’ll just turn to a slightly different topic while the Minister’s getting that advice.

This refers to clause 233. There’s a number of clauses here that deal with the calculation of what is the nature, extent, of the deposit insurance money that’s going to be paid, and clause 233 provides for the bank “to appoint 1 or more persons as reviewer as soon as is reasonably practicable after (a) a resolution ends … or (b) the Bank pays money out of the fund”. So this is a review process and it goes through in clause 233(2), saying “Before appointing the reviewer, the Bank must be satisfied that the … [reviewer] has the appropriate knowledge, [and] skills”—that’s good. In clause 233(3), the reviewer must “(a) assess whether the Bank’s calculation of the maximum amount complies with (i) the regulations … [etc., etc., etc.] … (b) prepare a draft report … and (c) consult the Bank on the draft report; and [then] (d) provide a final report to the Bank” after taking account of the bank’s comments on the draft.

Then there’s a very important thing in clause 233(4): “The reviewer may, when acting under … [this provision], only take into account information known to the Bank at the time that it makes the calculation”. So you can’t be hammering people for things you didn’t know at the time that payments were made. And clause 233(5): “The Bank must publish the final report on its Internet site.” But the bit I want to highlight is in the next subclause. New subclause 233(6), states “The Bank may redact any information from the final report that is published”—remember, it’s got to be published and it’s got to be republished on the Reserve Bank’s internet site—“if the Bank considers there would be a good reason for withholding the information under the Official Information Act 1982 if a request for that information were made under that Act.”

Now, that’s an extraordinary little clause sitting in this Deposit Takers Bill. And to be honest, I hadn’t really noticed it until I was reading through this and having a pretty good look at it. So this is meaning that the bank could doctor the report and in some cases make it meaningless if it so felt. So if the Opposition finance member wanted to find out about it, if the bank wanted to find out about what was in the final report, all of that may be precluded and is allowed for in contravention to the Official Information Act 1982. So maybe the Minister can just help—why this extraordinary power is in this bill and why it is necessary.

Just to just cover off a few of the questions and comments that have been made—with respect to Mr Bayly’s earlier remarks, the scheme is designed to cover New Zealand denominated accounts. There is a provision, which I think Mr Bayly probably knows about, for foreign currency to potentially come into the scheme at some point, but at this stage it isn’t in the scheme; it’s obviously accounts that operate through New Zealand banks or offshore-owned banks where there is a New Zealand subsidiary.

In terms of the comments made about the amount of money, the $100,000 level, it is commonplace in these sorts of pieces of legislation to insert a dollar amount. The idea of inflation indexing that would create a great deal of confusion, because inflation, obviously, does go up and down and there would be a need to work out how you would do that, on what basis—would you do it on a time basis? You know, every few years? In the end, as we do with most other bits of legislation, we put a dollar amount in. If the occasion arises in the future where we feel that not a sufficient number of depositors are covered by the Act, then one could come and amend the Act. But, as we would do in others, it’s pretty difficult to peg it to something that moves around so often that it would make it very confusing and I would imagine probably lower trust in the scheme. So that’s why we have the specific dollar amount.

In terms of Mr Bayly’s final point on clause 233—I mean, bear in mind that this is a very specific clause about an independent review of a resolution process under this part of the bill or of the Act. It would be normal, I would think, when you think about the kinds of entities that will be being discussed, the potential for particularly privacy issues—so sections 9(2)(a) and (b) of the Official Information Act cover the privacy of natural persons. And you can imagine when a review has been undertaken in this way that there may be a need to withhold some elements of the report.

I think, as in a few of the other comments made earlier this evening by the member and one of the other Opposition members, we always have to remember that the Reserve Bank is operating here in its independent way. It has a piece of legislation. It has to obey the law. It has to fit within the law, but it’s also responsible for some really important activities on behalf of New Zealanders: making sure in this case that they’ve been properly paid out, if the deposit compensation scheme is required to be put in place in other clauses around supervision of banking entities. They need the powers that they need in order to be able to give New Zealanders confidence. They also have to obey the law and I think that particular clause is appropriate in this place.

Thank you for that response, Minister. I suppose it’s the way that the clauses are worded. If the assertion of what the Minister’s just said, that the Reserve Bank can redact, under the current provisions of the oversight of the Official Information Act, then that’s fine. Because any entity has to comply with the Official Information Act and there are reasons why you can redact some.

But the way that this is worded in Subpart 6 maybe—and maybe this is what I’m trying to understand—implies that the Bank actually has a discretion even outside the Official Information Act requirements. Because it says the Bank may redact any information from the final report if the Bank considers there’s “a good reason”, not as allowed for or provided for under the Official Information Act.

So that’s the bit that I’m getting at. If it can redact, because it’s currently allowed under the Official Information Act, I get it; and I think that was the Minister’s assertion before. What this is saying—and it seems to suggest that the Reserve Bank has a discretion even outside the Official Information Act, to redact any information. That’s a bit I’m seeking clarification on, and I’m just conscious he may need to talk to officials, but I—

No, no, I don’t. The point I make here is the member needs to go back and read what 233 is about. The person being appointed here is, in fact, independent of the Bank. So what the clause is trying to do is ensure that any actions from a report undertaken by someone who’s independent would also be covered by something akin to the Official Information Act (OIA).

Actually, I think, when the member takes the time to read that clause, he will see that the linkage actually makes it very strong that it would need to be a good reason for withholding information as if it was under the OIA. So I think it achieves the goal that we both want there.

Thank you, Madam Chair. It’s a question with regards to the use of the Silicon Valley Bank as an example. That was technically a wholesale banking run, right? That’s where it started and that’s where the bailouts occurred. So we’ve obviously got examples closer to home in our recent history that fits these criteria better.

But I just have one question on moral hazard. As long as depositors are confident in choosing how our depository interests that the Reserve Bank of New Zealand (RBNZ) has their back, what could go wrong in terms of financial stability and risk? Should I repeat that?

Hon Grant Robertson: Yeah, I’m sorry.

DAMIEN SMITH: As long as depositors are confident when choosing higher deposit interests that the RBNZ has their back, what could potentially go wrong in terms of moral hazard?

Well, I mean, a range of issues could occur but the point is that we’re trying to strike a balance here between confidence that people’s deposits are safe, that they know that if the worst thing happens, they can get at least up to a hundred thousand dollars back. The Reserve Bank’s overall regulatory policy framework and supervisory framework should be giving us confidence that the moral hazard is unlikely to take place or to occur, and people will need to monitor their risk, particularly if they’re outside of what is regarded as the Reserve Bank’s—you know, a deposit taker that is covered by the Reserve Bank’s core functions. But moral hazard exists simply by the nature of the scheme existing. What we’re trying to do is find a balance so that it doesn’t encourage or incentivise risky behaviour.

What would go wrong, to answer the member’s question, would be if the supervisory and conduct work that the bank does hadn’t worked up until that point, at which point we would have highly risky entities which would then likely see the scheme utilised more often. I don’t think that’s what will occur because of the mitigation put in place by having those conduct and supervisory provisions that are earlier in the Act.

Thank you very much, Mr Chair. I’ve got a question in regards to subparagraph (ii) of clause 198(a), “Payments out of fund”, and this relates to the paying out of the bank’s expenditure. So, as part of the Deposit Compensation Fund, there’ll be a fund built up. This provision allows payments to go out of that fund, as the Minister of Finance articulated in his opening address. But subparagraph (ii) of clause 198(a) relates to the portion of that fund being paid out is actually expenditure that’s incurred by the Reserve Bank in regards to the provision or running of the overall fund. I acknowledge that that is appropriate, but my questions are in regards to how much we expect that the bank is going to be spending on administrating this fund and whether any budgets or consideration around headcount or costs have been considered yet, and whether that is, in the context, material or not. The other aspect is whether that actual budget, which obviously takes it in, as a drawer, out of that overall fund—that means that that money is no longer available to be paid out to depositors in this scenario—will have any cap or whether any other budgetary restrictions will be placed around that, acknowledging that that will be a sub-portion of the budget within the Reserve Bank, so not a separate line item, or maybe it might be in regards to the appropriation to the Reserve Bank in regards to that.

My second question is in regards to clause 218 of Part 6, around “Payment of entitlements”. My question here is, and I guess it’s more of a generic question: in a scenario where a stress event triggers that a payment needs to be made out and the bank’s gone through the process to calculate what that payment is for a relative individual or an investor, what is the time period, or what is the expected time period, that individuals would expect to need to wait before they would be paid out from this compensation scheme? Because the Minister outlined, in his opening address, in regards to the recent example in the US around Silicon Valley Bank and that process, and a lot of this aspect or the anxiety related to banking collapse is not only in their compensation, which, obviously, this will deal with, but the certainty in terms of a time period in which that will be paid out. It’s not clear, necessarily, whether there is any set time frames in which there is an expectation that that will be resolved, but if the Minister could provide any clarity in regards to that, that would be appreciated.

I just want to cover off a couple of those points. I mean, the first overall point is obviously that what happens once we pass this piece of legislation is that the final details of the scheme and of the fund will be agreed, and it’s important that the consultation takes place between those who will be regulated by the scheme and those who will be levied and the Reserve Bank itself. I would note that later on in Subpart 7, the Minister is obliged to publish a statement of funding approach, and then Subpart 6 that appears before is around the striking of the levies for the scheme. That includes the Governor-General, by Order in Council, making those regulations for providing the levies. That includes a series of recommendations based on the principles of levies being prescribed on the basis of the lists that are in subclauses (2) and (3) of clause 237, so there are a number of regulations that sit around that that will provide transparency to people around what money is being used for what purpose under the scheme.

In terms of the timing issue for the member Simon Watts, I will just seek a little bit of advice on that, but that is probably a matter that I imagine will be dealt with as the scheme is finally designed. In other jurisdictions, it is very important that people are paid out swiftly and rapidly, and that’s how we get confidence in the scheme.

The question is that the Minister’s amendments to Part 6 set out on Supplementary Order Paper 361 be agreed to.