Submission: Reject deposit insurance for finance companies

The New Zealand Taxpayers' Union has submitted on the proposed Deposit Takers Act, warning against the proposed insurance scheme that will see Ponzi schemes bailed out by taxpayers.

Click here to read the full submission.

Executive summary:

This submission contends that implementing deposit insurance for finance companies would be a
short-sighted policy and must be considered a policy option distinct from deposit insurance only for
banks.

Finance companies operate within a different set of moral hazard concerns than banks do, which
deposit insurance schemes interact with to drive the sort of risk-seeking behaviour that makes the
guarantee more likely to be activated.

Economic stability is, however, not protected by deposit insurance for finance companies, in the same
way it may be for banks.

In New Zealand, finance companies now make an even smaller proportion of capital markets than they
did prior to the Global Financial Crisis (GFC). The deposit guarantee scheme put in place for finance
companies then was of dubious value, even with their larger share of the market in 2008.

The Reserve Bank Governor would be placed in an unenviable position as regulator for finance
company deposit insurance, as that portion of the market is regularly plagued by scandal and Serious
Fraud Office investigations.

While there is valid debate as to the correct policy balance for insuring deposits in banks, the case is
settled that finance companies should not be included in a scheme such as the one proposed. It is
recommended that finance companies be removed from the Draft Bill.