What is the Depositor Compensation Scheme?
The Depositor Compensation Scheme (DCS) is set to launch in mid-2025, safeguarding each depositor up to $100,000 per licensed deposit taker in case of a deposit taker failure. If it is necessary for the DCS to be triggered, the DCS will pay out funds to eligible depositors. The DCS fund can also be used to fund the resolution of a failed deposit taker within limits defined in the Deposit Takers Act 2023 (the Act). Resolution is chosen when deemed necessary for a deposit taker to avoid the standard insolvency process due to the risk of loss of critical functions, broader contagion, and financial stability. The DCS will contribute to financial stability by assuring depositors of quick access to their funds if a deposit taker fails.
Under the Act, the expectation is that levies from licensed deposit takers will fully fund the DCS over time. These levies will be managed in the DCS fund by Te Pūtea Matua – the Reserve Bank of New Zealand and exclusively used for DCS-related costs.
What is the Treasury's role?
Te Tai Ōhanga – The Treasury has led policy work to enable publication of the Minister of Finance’s (Minister’s) funding strategy for the DCS, known as the Statement of Funding Approach (SoFA). Robust funding arrangements are critical to achieving the objectives of the DCS and publishing the SoFA is an important milestone towards implementing the DCS.
The SoFA is the funding strategy for the DCS
The SoFA outlines the financial structure for the DCS by detailing expected costs, informing the strategy for building and investing the fund, and establishing provisions for Crown support if the DCS fund falls short for payouts or other expenses (the Crown backstop). The Act requires the Minister to issue a SoFA at least every five years. The SoFA uses targets for building the DCS fund, to set the amount of levies that will be collected over time. This target fund approach results in a predictable forward path of levies and is consistent with international practice. The SoFA sets a target fund size of 0.8% of protected deposits, consistent with Treasury’s estimates of the liabilities for the DCS associated with severe but plausible failure scenarios to the DCS. The fund will be built over 20 years to spread the cost equitably over a large cohort of deposit takers.
The other aspects covered in the funding strategy are targeted towards public confidence in the DCS, while ensuring efficiency in delivering the scheme. The SoFA requires the Reserve Bank to manage the fund to maintain its real value, considering inflation over the long term, with a focus on liquidity to enable swift payouts after failures. Should the fund fall short of covering the DCS's liabilities, the Crown will provide cost-reflective loans to the scheme.
Regular SoFA reviews (at least every five years) enable the Minister to adapt the funding of the DCS in response to new information, including evolving evidence about likely costs. The Treasury will also monitor the liabilities of the DCS and recommend an out-of-cycle adjustment to the SoFA in certain situations. These could include the fund targets being met, significant failure events, or significant changes in risk information. This SoFA includes guidance on what an out-of-cycle review triggered by failures could cover, while recognising it is important that the government of the day has flexibility to respond to new information or events.
What is the Reserve Bank’s role?
Te Pūtea Matua – Reserve Bank of New Zealand is operationalising the DCS and will administer the DCS fund on behalf of the Crown. The Reserve Bank is also leading work on the design of the DCS levy regulations.
The Reserve Bank has previously consulted on the levy framework for the DCS and on the DCS Regulations. The publication of the SoFA will enable DCS levy regulations to be introduced alongside the implementation of the DCS in mid-2025. The SoFA sets out targets that will impact the overall levies charged to deposit takers, while the levy regulations will determine how the costs of funding the DCS are to be distributed amongst deposit takers.
The Reserve Bank is the primary owner of the DCS and you can find more information about the scheme and the Reserve Bank’s role in connection to the scheme on the main website for the DCS here: Depositor Compensation Scheme - Reserve Bank of New Zealand - Te Pūtea Matua (rbnz.govt.nz)