BusinessDesk investments editor Frances Cook responds to emails from readers each week to answer questions about money. Below, you will find her expert advice. Send your own questions to [email protected].
Hi Frances,
Can you please confirm whether there is minimum deposit protection in NZ if a big bank fails, such as ASB, ANZ, Westpac and Kiwibank? I am scared it may happen, as a similar incident happened to US Silicon Valley Bank.
If a big bank failed in NZ, is there minimum deposit protection in NZ? And how much will it be? Does that apply to any bank in NZ such as ASB, ANZ, Westpac and Kiwibank?
The next question is whether our government will bail out these problem banks.
Many thanks,
M
Hi M,
First, a bit of background for anyone who missed this. Silicon Valley Bank (SVB) failed after a run on its assets – basically, customers all asked for their money back at once, the bank couldn’t hand over that much cash, and it keeled over.
Why is it a problem when customers all ask for their money back at once?
When you put money into the bank, they don’t keep it in a big vault downstairs. Most of us put our money in and leave it alone, and banks take advantage of that by doing things like investing it or loaning it out again in mortgages. That’s how they make their money.
So, they can give back your money in the regular course of business when some customers are ready to make a withdrawal, but the system relies on everybody not asking for all of their money back at once.
SVB’s collapse is a big deal because it’s the 16th-largest bank in the US and the second biggest to fail after Washington Mutual’s collapse during the 2008 global financial crisis (GFC).
For context, it’s a bigger bank than ANZ here in New Zealand, which is our biggest bank. SVB had assets of US$209 billion (NZ$336.4b), while ANZ NZ has assets of US$120b.
It’s a lot of money that may have been lost.
So, back to your question. Could it happen here, and should we be worried?
The NZ system
Currently, NZ is quite unusual because we have very little formal protection for bank customers.
We don’t have deposit insurance, which protects people’s money in exactly these situations. Almost all other countries in the OECD have that.
In the US, for those impacted by the SVB collapse, they’re protected for up to US$250,000. Not fool-proof, as some companies had millions with them, but enough to protect the average person who can’t afford to lose their savings.
NZ? No, we don’t have that – at least, not right now.
Thankfully, that’s busily being changed. And not a moment too soon.
Future protections
The Deposit Takers Bill is currently working its way through parliament and would protect New Zealanders in the event of a bank, or even non-bank deposit taker such as a building society, failing.
It creates a state-run insurance scheme to guarantee bank deposits, aka, your savings.
The Reserve Bank of NZ (RBNZ) expects it to be up and running by early 2024.
Your money would be protected up to $100,000 per person, per bank, which would currently cover 93% of NZ’s bank deposits.
Even if you were outside of that and had say, $200,000 in savings, you could put $100,000 with two different banks, and have the full amount protected.
If you’re feeling nervous, that’s one strategy I recommend anyway.
When I talk to people about investing, we often talk about not putting all your eggs in one basket. I think that applies to everything to do with money.
I personally split my savings across two of the main banks.
Do I think they’re about to collapse? Absolutely not.
Our banks are highly rated by credit agencies and subject to strict rules about how much cash they need to keep on hand. The rules here are stricter than what SVB was operating under in the US, and I think we can all see the value in that now.
However, by the time I got a whiff of trouble, it would be too late. These events can move fast.
It costs me nothing to split my savings across two of the major banks (as long as I make sure to choose low- or no-fee accounts), and it lowers my risk should the unthinkable happen.
This is a case of me being extremely cautious. But I like being cautious in these situations where it costs me nothing to do, and even the small risk of a bad thing happening would have large, bad, consequences.
Current protections
Until this legislation comes into force in (hopefully) 2024, are we on our own? Not really, and we just need to look back in time to the GFC to see what happened then.
In NZ, the government brought in a temporary insurance scheme that covered both the banks and depositors in finance companies.
It’s a sort of de facto insurance for times of crisis. I’m glad we’re bringing in a more formal system, but at least there’s that until then.
The Reserve Bank has what’s called an “open bank resolution” which allows it to step in if a bank is in major trouble. They can put the failed bank under statutory management and reopen it the next day, giving customers quick access to their accounts so that business can continue.
Day-to-day life continues, while the central bank gets time to put together a longer-term solution.
Sector risks
Another thing to consider is why there was a run on SVB, because that’s also a factor for whether other banks are at risk.
The full facts are still coming out, but one feature here is that SVB served the tech industry, especially startups and venture-backed tech.
Not to put too fine a point on it, but that’s a risk in itself. It’s a smaller, tight-knit community where there’s a lot of cash controlled by a smaller number of people.
They all talk to each other, and they often have herd-like behaviour, jumping simply because others are.
It’s the perfect condition for a run on a bank, once the WhatsApp chat gets a bit panicky.
In the NZ, and even Australian, context, we’re not big enough to have a bank serving such a niche community. By having a broader customer base, it does help insulate against some of these shocks.
Bottom line? I don’t think New Zealanders need to lose sleep over this. But it doesn’t hurt to split your savings across two different banks, just in case.
A note on last week
A reader has sent through this excellent tidbit, in response to last week’s column about a reader who is considering going overseas but doesn’t want to turn their home into an investment property for ethical reasons.
I pointed out that becoming a landlord could be done ethically if they chose to, and recommended a property manager for while they were overseas.
This reader, a property investor for several years, emailed to make this point.
In your column, you say you still suggest a property manager for R. I might remind you it is not an option but a legal requirement to have an agent/or property manager if you are out of the country for more than three weeks.
Extract from Citizens Advice:
"If you own a rental property in New Zealand and will be out of the country for more than 21 consecutive days, by law you must appoint an agent who can act on your behalf.
“This is so your tenant has someone to contact with any issues (for example, if the rental property needs repairs).
“You can appoint anyone to be your agent, but it should be someone you trust to look after your rental property and your tenants. You could engage a professional property manager or ask a friend or family member."
We have rental properties. We treat our tenants with respect and dignity and our longest tenant has been with us for around 14 years.
We are fully compliant and many of the new rental requirements are what we already practised anyway.
Originally, we managed our properties ourselves, but with the numerous new regulations we realised we had better go with a property manager, which is the way we have been for the past 7-8 years.
Thank you to the reader for sending this information through, and for sharing their positive experience with using a property manager.
Send questions to [email protected] if you want to be featured in the column. Emails should be about 200 words, and we won't publish your name. Unfortunately, Frances is not able to respond to every email received, or offer individual financial advice.
Information in this column is general in nature and should not be taken as individual financial advice. Frances Cook and BusinessDesk are not responsible for any loss a reader may suffer.
