Crown Retail Deposit Guarantee Scheme Overview and Insights

The Crown Retail Deposit Guarantee Scheme was introduced in 2008 by the New Zealand government to provide protection for depositors in the event of a bank failure. It guarantees deposits up to $50,000 per person, per institution.

This scheme is administered by the Reserve Bank of New Zealand and has been instrumental in maintaining confidence in the banking system.

The scheme covers deposits held in banks, building societies, and credit unions.

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The Scheme was introduced by the Australian Government in response to the global financial crisis. It aimed to restore confidence in the banking system and protect depositors' funds.

The Scheme guaranteed deposits in eligible financial institutions, including banks, building societies, and credit unions. This meant that depositors' funds were safe, even if the financial institution failed.

The Scheme was established on October 13, 2008, and it operated until April 30, 2010. During this time, the Scheme protected over $1.2 trillion in deposits.

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Depositors with accounts in eligible financial institutions did not need to take any action to be covered by the Scheme. Their deposits were automatically protected.

The Scheme was funded by the Australian Government, which bore the cost of any losses incurred by the Scheme. This ensured that depositors' funds were protected, without any additional risk to depositors.

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The Crown Retail Deposit Guarantee Scheme was designed to provide confidence to depositors that their deposits were safe, even if the bank failed. This was a key aspect of the scheme.

The scheme was introduced in 2008, in response to the global financial crisis. The government guaranteed deposits up to $50,000 per person in each bank.

This meant that depositors had a sense of security, knowing that their deposits were protected, even if the bank encountered financial difficulties.

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The Treasury's experience with payout processes was a significant learning curve. They learned valuable lessons from the Mascot Finance Limited payout, which highlighted the need for a more robust and scalable payout solution.

The Treasury comprehensively analysed what was needed and explored a number of options, ultimately setting up an outsourcing arrangement with Computershare Investor Services Limited in late 2009 to process claims efficiently.

This outsourcing model was a sound decision and contributed to an efficient payout process, allowing the Treasury to manage payouts for all institutions that failed after the first two.

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Payout processes were a key area of focus for the Treasury, with several finance companies failing under the Scheme.

Nine finance companies accepted into the Scheme failed between 2009 and 2010, with the first one failing in March 2009 and the last one in 2010.

Planning for payouts had started in the week before Mascot Finance Limited failed in March 2009, but the Treasury responded quickly to ensure a smooth payout process.

Several issues complicated the claims processing, including complex depositor eligibility criteria and the payment of interest to depositors from the date that the institution failed.

The Treasury learned valuable lessons from the experience of the Mascot Finance Limited payout and applied this knowledge to improve future payout processes.

An outsourcing arrangement was set up in late 2009 for Computershare Investor Services Limited to process claims, which contributed to an efficient payout process.

South Canterbury Finance Limited's failure on 31 August 2010 presented more challenges due to the large number of deposits and potential for interest payments to increase costs.

The Treasury used early warning of the failure to extensively analyse how to simplify the payout process and reduce the Crown's liability, likely resulting in significant savings.

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In the early weeks of the Scheme, there was a call centre and regularly updated information on the Treasury's website, which ensured the public was aware of the Scheme and the policy decisions made to refine its design.

The Treasury's website provided useful and timely information about the Scheme, including a list of institutions approved under the Scheme, along with their guarantee deeds.

In most instances, the information provided was well-organized, but it wasn't always easy to find.

The Treasury's website also provided details about changes to the Scheme for the Revised and Extended Schemes, including the reasons for extending the Scheme, the implications of the various options, and the final design features.

A list of institutions that had failed under the Scheme, the process for making a claim, progress with payouts to depositors, and the amount of repayments made was also available on the Treasury's website.

Information to Parliament through the Minister of Finance was comprehensive, providing adequate and timely background details and supporting analysis for the various policy design issues as they emerged.

The Minister was kept informed, and Parliament was provided with timely and effective information on the options for an Extended Scheme, which was of a high quality.

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New Zealand was the only OECD country without a statutory depositor insurance or depositor preference arrangement before the global financial crisis.

The country's approach to supervision and regulation favored minimal intervention in the financial system and market-based solutions, supported by good disclosure requirements.

This approach was a significant departure from the introduction of a deposit guarantee scheme, which was a material change for New Zealand's financial landscape.

New Zealand applied a less intrusive and disclosure-based regime to banks than most other OECD countries.

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Finance companies may seem small, holding less than 3% of the assets in the financial sector, but they play a vital role in servicing sectors of the economy not covered by other institutions.

Their significance was recognized by the Government before the introduction of the Scheme, which aimed to address the problems finance companies faced.

Finance companies experienced significant issues in the years leading up to the Scheme, partly due to funding pressures and investor uncertainty during the global financial crisis.

The Government took steps to increase regulatory oversight of finance companies, starting with the appointment of the Reserve Bank as regulator in September 2009.

Prudential requirements were also introduced to strengthen the regulatory framework for finance companies.

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The Crown Retail Deposit Guarantee Scheme Bill [2009] NZBORARP 51 was a significant piece of legislation that aimed to extend the Scheme on changed terms and conditions until 31 December 2011.

The Bill was likely to be considered by the Cabinet Legislation Committee on Thursday, 27 August 2009, and it proposed to maintain depositor confidence in a period of extreme financial market stress during the period between Parliaments.

The Bill clarified that the Public Finance Act 1989 was not affected by the Bill, and it confirmed that the giving of guarantees by the Crown under the Bill was lawful.

The Public Law Group and the Office of Legal Counsel prepared the advice, which concluded that the Bill did not appear to be inconsistent with the rights and freedoms affirmed in the New Zealand Bill of Rights Act.

Here is a summary of the key points from the advice:

The advice was prepared to assist the Attorney-General to determine whether a report should be made to Parliament under s 7 of the New Zealand Bill of Rights Act 1990 in relation to the Crown Retail Deposit Guarantee Scheme Bill.

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New Zealand was the only OECD country without a statutory depositor insurance or depositor preference arrangement before the global financial crisis.

Before introducing a deposit guarantee scheme, New Zealand's approach to supervision and regulation favored minimal intervention in the financial system and market-based solutions, supported by good disclosure requirements.

No set of international benchmarks provides an adequate frame of reference to assess the Treasury's implementation of the Scheme, due to New Zealand's unique minimal interventionist approach.

New Zealand applied a less intrusive and disclosure-based regime to banks than most other OECD countries.

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