General Questions and AnswersDeposit Guarantee Scheme

Page updated 29 Jun 2009

What is the purpose of the scheme?

The government introduced the deposit guarantee scheme to ensure continuing depositor confidence in New Zealand given international financial market turbulence. The scheme is similar to those now offered by other countries, including Australia, and follows other measures that have been undertaken by the Reserve Bank to ensure the liquidity of the banking system.

What would trigger the guarantee?

There are a number of situations known as default events which would trigger the guarantee. These include, among others, the failure of an institution to pay a required sum to a creditor (including interest payments), and an institution becoming insolvent or being placed into statutory management. For a full list of default events please refer to the specimen Crown Deeds of Guarantee for Banks, Non-Banks and Building Societies on the front page of this section of the website.

Do I have to do anything to activate the guarantee if an institution defaults?

Yes – debtors will have to submit a notice of claim to the Crown.

How long will it take to get my money back if the guarantee is invoked?

There is no fixed period for repayment, but it will be made as soon as possible in order to maintain investor confidence. The process of paying out under the guarantee can begin from the time of the default event: it is not necessary to wait for winding-up proceedings, should these be necessary.

Are interest payments covered if an institution defaults?

If an institution defaults and the guarantee is called upon, the principal sum borrowed will be paid back, along with interest to the date of default (subject to the $1 million cap detailed below). In some circumstances interest for the whole term of the deposit will be guaranteed. You would need to check this with the deposit-taker.

Can the Crown withdraw the guarantee from a creditor? Am I still covered if this happens?

The Crown can withdraw a guarantee for a number of reasons – see the specimen Deed of Guarantee on the front page of this section of this website for details. If this happens all retail deposits made up until the date of the guarantee’s withdrawal are covered by the guarantee.

What is "retail"?

Updated 29 June 2009

For the purposes of the Deposit Guarantee Scheme, retail deposits include deposits made by anyone other than a financial institution (e.g. banks, superannuation schemes, insurers, investment advisers, professional trustees, non-bank deposit-takers themselves and others that provide financial services as part of their business) unless that financial institution is acting as bare trustee for eligible investors.

Are deposits held by the trustees of a trust, one of which is a Financial Institution, covered by the guarantee?

Updated 29 June 2009

Generally speaking, deposits held by the trustees of a trust, one of which is a Financial Institution, will be covered by the guarantee as long as at least one of the other trustees is eligible under the guarantee. If the Financial Institution is a sole trustee, debt securities issued by a Crown-guaranteed institution will not be covered by the guarantee unless the Financial Institution is acting as bare trustee for eligible investors.

Will deposits be covered where they are part of a portfolio managed by a Financial Institution?

Updated 29 June 2009

 In general terms, debt securities issued by a Crown-guaranteed institution held by an investor:

• in their own name, and
• who is otherwise eligible under the guarantee

will be covered by the guarantees even though the investments are part of a portfolio which is designed and managed by an investment adviser who is a Financial Institution. If the debt securities are held by the Financial Institution on trust for an otherwise eligible investor, they won’t be covered by the guarantee unless the Financial Institution is acting as a bare trustee for eligible investors.

Will deposits be covered where the holder’s affairs are managed by a Financial Institution under an enduring power of attorney?

Updated 29 June 2009

Generally speaking, debt securities issued by a Crown-guaranteed institution held by an investor:

• in their own name, and
• who is otherwise eligible under the guarantee

will be covered by the guarantee if the investor has granted their adviser authority over their affairs under an enduring power of attorney, even though the adviser may be a Financial Institution.

Will deposits held by a Financial Institution through a pooling mechanism (such as a wrap account) be covered by the guarantee?

Updated 29 June 2009

A Financial Institution that holds debt securities issued by a Crown-guaranteed institution as custodian or manager of a pooling mechanism (such as a wrap account) will not generally be covered by the guarantee. The exception to this is where the Financial Institution is a bare trustee for the underlying investors. In that case, the Financial Institution will be eligible if the underlying investors are eligible.

Does the guarantee apply to non-banks / finance companies?

Yes. All operating non-bank deposit takers (i.e. those that are not in breach of their trust deed) are eligible to apply for the deposit guarantee scheme. Customers should check with their institution to confirm whether they are going to seek cover.

The guarantee does not provide cover to those institutions currently in receivership operating under a moratorium arrangement, or those who have suspended repayments to investors.

What deposits are covered by the guarantee?

The guarantee will protect debt securities held by retail investors and issued by businesses covered by the guarantee.

Debt security means any interest in or right to be paid money that is deposited with or lent to another person.

It includes deposits, term deposits, current accounts, bonds, bank bills and debentures.

Bonus bonds will be covered only if the investments underlying the bonds are exclusively government securities or debt securities issued by institutions covered by the Crown guarantee. If bonus bonds include investment in non-guaranteed securities they will not be covered.

Debt security does not include interests in superannuation schemes, unit trusts, shares or similar instruments where the income from the investment is shared, except for cash PIEs.

Subordinated debt issued by banks or non-bank deposit takers will not be covered by the guarantee (different rules apply for building societies and credit unions). Subordinated debt refers to deposits or loans that are repayable after all other creditors of the bank or non-bank deposit taker have been repaid. It ranks behind other creditors in terms of distributions on insolvency (but ranks before distributions to shareholders).

Will deposits of family trusts and businesses be included in the deposit guarantee scheme?

Generally retail deposits of family trusts and businesses placed with institutions that are part of the scheme will be guaranteed. Some exclusions apply (for example, if the business is a financial institution, or the depositor is not a New Zealand tax resident or New Zealand citizen and has made a deposit with a non-bank).

Are bare trusts guaranteed?

Bare trusts (where providers of trustee and nominee services hold funds on behalf of other persons and have no discretion over the investment of the securities and no beneficial interest in them) will be covered by the guarantee, provided that the bare trustee can demonstrate that the beneficiary of the bare trust comes within the ambit of the guarantee.

Are deposits denominated in foreign currency covered?

Updated 14 May 2009

Retail deposits denominated in foreign currency of financial institutions which have a crown guarantee will be guaranteed in the same way as deposits denominated in New Zealand dollars. The amount guaranteed will be the New Zealand dollar equivalent of the foreign currency amount.

Is there any charge for individuals to have their deposits guaranteed?

There is no direct fee for individuals, but institutions will determine if and how the costs of the scheme are passed on.

Is there a cap on the value of deposits that are guaranteed?

Yes. There is a deposit coverage cap of $1 million per depositor per covered institution.

What if I have money in a joint account that exceeds $1 million – is this outside the guaranteed cap?

The $1 million cap is on individual creditors (e.g. a “natural person”, unincorporated society, company etc), not on accounts. For the legal definition of a “creditor”, please refer to the specimen Crown Deeds of Guarantee for banks, non-banks and building societies provided on the home page of this section of the website.

The example below of how the cap could be applied to holders of one or more joint accounts is for illustrative purposes only; people should seek independent advice on how their legal and personal financial situation may be affected.

If a husband and wife have a total of $1.5 million deposited in one or more joint accounts in an institution, then that represents $750,000 for each of them. The husband and wife can each have another $250,000 deposited under their own name in the institution where the joint account(s) is held before they would individually reach the $1 million cap.

Why has a cap been introduced?

This has been introduced to close off potential avenues for wholesale funding (whether deposits or securities) to get coverage under a retail deposit guarantee scheme. The $1 million cap will separate substantially retail from wholesale deposits. The cap should be ample to cover all reasonable needs of the household sector and the working capital balances of small and medium-sized businesses.

How long will the guarantee be for?

Once an institution's application is accepted, the deposit guarantee will be effective against defaults by the deposit taker occurring between 12 October 2008 and 12 October 2010 (“the guarantee period”).

Long-term debt securities taken out before or during the guarantee period are covered if a default event occurs within the guarantee period. The guarantee will not cover any default after the guarantee period ends, even if the debt security was taken out during the guarantee period. Once an institution’s application is accepted the deposit guarantee will be effective from 12 October 2008 and will last until 12 October 2010.

What about non-residents?

Updated 14 May 2009

The guarantee will cover resident and non-resident holders of debt securities issued by approved New Zealand-registered banks.

However, for approved local branches of overseas banks existing on 12 October 2008, the guarantee for depositors in these branches who are neither New Zealand residents nor New Zealand citizens will be capped at the total amount owed to such depositors at 12 October 2008, allowing for growth of 10 percent per year. New Zealand tax residents or New Zealand citizens will not be subject to this cap.

For approved non-bank deposit takers, only debt securities held by New Zealand tax residents or New Zealand citizens will be covered by the guarantee.

In all of the above situations, the deposit coverage cap of $1 million per depositor per covered institution also applies.

Are collective investment schemes guaranteed?

Collective investment schemes (such as Portfolio Investment Entities [PIEs], unit trusts and superannuation schemes) will be able to claim on the guarantee provided:

• they invest exclusively in New Zealand government securities or debt securities issued by institutions covered by the Crown guarantee;
• they do not increase their investments in guaranteed institutions that are not registered banks beyond the level that existed as at 12 October 2008; and
• their rules ensure any money paid under the guarantee will only be distributed to retail members.

If a financial institution has been approved under the deposit guarantee scheme, are any collective investment schemes it offers automatically covered by the guarantee?

No, they are not automatically covered by the guarantee; they have to be individually approved. Applications, assessments and approvals of collective investment schemes are considered separately from the institutions that offer them.

Can new collective investment schemes apply?

A new collective investment scheme that does not have any members may apply to be covered by the guarantee. If the rules of the collective investment scheme satisfy the Crown’s eligibility criteria and the Crown is satisfied that the scheme is likely to attract over 20 members, then the scheme may be approved for coverage under the guarantee.

Will collective investment schemes be charged a fee?

Collective investment schemes eligible for coverage under the guarantee scheme will not be charged a fee. As they are investing in institutions with a guarantee or government securities, a fee on collective investment schemes would mean, in effect, they were paying twice.

Does the $1 million cap apply to collective investment schemes?

The cap will apply to the individual investor rather than the collective investment scheme itself. The guarantee deed and related collective investment scheme deed will give effect to this.

What about joint holdings in collective investment schemes?

The cap on CIS holdings will apply to joint holdings in the same manner as it is applied to joint deposits in banks or non-banks (please refer to the earlier question on joint accounts). The $1 million cap is on individual creditors. The legal definition of creditor in the deeds for the banks and non-banks is incorporated into the CIS Deed of Nomination.

Some collective investment schemes have a mix of financial institution members and retail members. Would financial institution members be eligible for money paid under the guarantee?

No, financial institution members would not be covered by the guarantee. The collective investment scheme’s rules must ensure any money paid under the guarantee will only be distributed to retail members. This may mean a number of existing retail investment schemes will need to change their rules to be eligible for the guarantee.

Is my institution guaranteed?

Those institutions that are eligible are:

• all banks
• other deposit takers who have not breached their trust deed

We expect all eligible institutions will apply and will let their depositors know as soon as they are approved.

We will post a list of approved/guaranteed institutions on our website – updated as new approvals are granted.

Which institutions will be covered by the guarantee?

Applications are initially invited from businesses that meet all the following criteria:

• Issue debt securities to the public
• Are in the business of borrowing and lending, or providing financial services, or both
• Carry out a substantial portion of their business in New Zealand.
• Do not primarily provide financial services or lend to related parties and group members

Applicants are advised to provide sufficient details of their business activities to enable an assessment of whether they qualify for the guarantee.

How much does it cost for institutions to be covered by the scheme?

For institutions with total retail deposits above $5 billion, a fee of 10 basis points per annum will be charged on the amount above $5 billion. This means that a bank with $20 billion in retail deposits would pay $15 million in fees per annum.

There are also fees for the new business component of registered banks and non-bank deposit-takers that are not already subject to a fee charge. These institutions whose covered liabilities are under $5 billion will be charged the following fees on the cumulative growth in their book since 12 October 2008:

• 10 basis points per annum to institutions rated AA minus and above
• 20 basis points per annum to institutions rated A+, A and A minus
• 50 basis points per annum to institutions rated BBB+, BBB and BBB minus
• 100 basis points per annum to institutions rated BB+ and BB
• 300 basis points per annum to institutions rated below BB or are unrated

Growth is measured, and charged for, monthly.

There is an incentive for institutions who were unrated as at 12 October 2008 to become rated BB and above. If a rating of BB and above is achieved during the term of the retail guarantee scheme, the institution will be eligible for a rebate to 100 basis points.

What is the cost to the Crown?

This depends on the degree (if any) to which the guarantee is drawn on (like any insurance scheme). Any guarantees will be recorded as unquantified, contingent liabilities of the Crown.

Will there be protection against risky companies taking advantage of the guarantee?

All deposit takers who are not registered banks who sign the guarantee will have to agree to certain controls on their business as a condition of the guarantee. These controls will include:

• Some restrictions on distributions to shareholders
• Some assurance that the business dealings of the deposit taker are on arms-length terms
• The ability for the Crown to appoint an inspector
• The ability for the Crown to withdraw the guarantee if the business is being deliberately operated in a way to undermine the intention of the guarantee
• Personal undertakings from directors to ensure the non-bank deposit takers comply with the guarantee

Will companies currently in breach of their trust deeds be eligible to sign the guarantee if they can re-establish compliance with their trust deeds?

Deposit takers that were in breach of their trust deeds as at 12 October 2008 will not be considered eligible to sign the guarantee unless they are back in compliance with their trust deeds, and they have obtained a credit rating of BBB- (or equivalent) or better.

Any “phoenix companies” that have all or most of the same directors who served with a company in moratorium that is still in moratorium, or a company wound up or in receivership, are unlikely to be eligible to sign the guarantee.

Will companies that are formed or wish to newly enter the market during the guarantee period be covered by the guarantee?

New entrants must meet the general criteria to be eligible for a guarantee (e.g. they must be in the business of borrowing and lending money, and carry on a substantial proportion of their business in New Zealand etc). In addition, they must have obtained a credit rating of BBB- or above.

Will the deposit guarantee scheme be replaced or extended after 12 October 2010?

Added 2 Mar 2009

The government offered the deposit guarantee for a two-year term as a response to international financial market turbulence. This will give time to see how well international financial markets stabilise. A thorough assessment about the ongoing need for, and design of, an arrangement, if any, to replace the deposit guarantee scheme is being considered and options will be announced in due course.