Depositor coverage cap - reduced and differential coverage for banks and NBDTs
The current DGS has a cap on guaranteed deposits of up to $1 million per depositor per eligible institution. This is relatively high by international standards.
The extended DGS proposes reducing coverage per depositor, per institution to $250,000 for NBDTs, and $500,000 for banks. Reduced coverage signals the temporary and transitional nature of the DGS, reduces Crown contingent liability, and could reduce fiscal costs of any future default events (to the extent that depositors do no spread deposits across institutions). It also reduces NBDT reliance on a few large depositors, but balances these objectives against not setting the cap on NBDTs so low as to be likely to trigger failure. The lower cap for NBDTs compared to banks reflects the higher risks in this sector compared to the lower risk of banks that by-and-large are covered by a tighter prudential regime.
Table 4 summarises the proposed design features of the extended DGS.
| Design parameter | Current DGS | Extended DGS | Rationale for difference (if any) |
|---|---|---|---|
| Length of extension | Expiry on October 2010. | Expiry with definite end date on 31 December 2011. | Less disruptive and potentially less costly exit from DGS. |
| Fees |
Heavily subsidised. Fees only on growth and guaranteed deposits in excess of $5 billion - somewhat risk based. |
Reduced subsidy. Full book pricing. More risk-based (see Table 3 above). |
Manage Crown risk better, facilitate adjustment and minimise distortions. |
| Institutional eligibility |
Voluntary. General eligibility criteria later restricted to BBB- or above for new entrants. Membership of retail DGS one factor taking into account to gain access to Wholesale Facility. |
Voluntary. Minimum credit rating BB. Only open to institutions currently guaranteed (except new entrant registered banks, or merged entities, at the Crown's discretion). CISs excluded from scheme. Access to the Wholesale Facility will no longer take into account membership of the retail DGS. |
Tighter criteria to assist transition from the scheme. |
| Depositor coverage cap | Up to $1 million per depositor per institution. | Up to $500,000 for banks and $250,000 for non-banks per depositor per institution. |
Signals transitional nature. May reduce Crown contingent liability. |
| Management tools | Limited tools, but can introduce amended deed to cover the desirable changes to the current DGS, including restrictions on undesirable asset acquisition and deposit growth, and change of control authorization. |
These additional provisions can also be included in the deed for extension. Provides a natural opportunity to update deeds to include stronger management tools. |
Attempt to better manage the exposure by using existing tools more actively. |
| Resolution tools | Statutory management triggers payout under the DGS. | Redefine default event so that statutory management can be used without immediately triggering requirement to payout. |
Institution may be able to continue to trade under statutory management Time to consider resolution options. |
