The government will introduce a bank deposit guarantee scheme, to give customers better protection if their bank was to go under.
Finance Minister Grant Robertson. Photo: RNZ / Dom Thomas
It also plans to look at a tougher regime to make bank executives more accountable for bad behaviour, or undesirable banking practices.
This is part of the review of the Reserve Bank Act, which is looking at whether the 30-year-old laws regulating the banking system are up to scratch.
The government is proposing a limit of between $30,000 and $50,000 for the guarantee scheme, which would cover 90 percent of individual bank deposits in New Zealand.
The amount of coverage is much larger in other countries: $NZ263,565 in Australia, $164,259 in the United Kingdom, $378,901 in the US and $111,886 in Canada.
Finance Minister Grant Robertson said New Zealand had been an outlier for many years as it had not had a "formal" deposit protection regime.
"Our banks are safe and sound", he said, "however, the OECD and IMF have said that our banking system might be more vulnerable in a crisis, because we don't have a deposit protection regime. A deposit protection regime will increase public confidence in the banks."
Prime Minister Jacinda Ardern said New Zealand was one of a few countries not to have such a scheme.
"This means that Kiwis with bank deposits have no protection from the failure of a financial institution, which would be from risks beyond their control."
Mr Robertson said the price cap was "within the ballpark" of other countries New Zealanders compared itself to in regards to banking, but admitted it was at "the lower end".
"For most people, what they're worried about in the unlikely event of a bank collapse is the ability to be able to keep paying the mortgage, keep paying the bills," he said.
"We believe this strikes the right balance."
New Zealand's existing "open banking resolution" system would continue to run alongside the scheme which would potentially provide "quite a high degree of support", Mr Roberston said.
He told reporters it was "still to be decided" how the scheme would be funded, but said most countries did so with a bank levy.
The levy would take some time to build up enough funds as insurance, and so would likely require a "taxpayer backstop" in the meantime.
As part of the review, the government will also look at whether the powers of the Reserve Bank are strong enough to regulate the banking sector - an issue highlighted by last week's departure of ANZ chief executive David Hisco over his handling of company expenses.
It is looking at regimes in other countries that would put more onus on senior executives to uphold certain expectations of conduct for individual banks.
The Bank Executive Accountability Regime in Australia and the Senior Managers Regime in the UK were given as two examples that "assign duties to individual decision-makers at banks", so if things went wrong the "individuals directly responsible can be identified and held to account".
"These regimes go a step further than New Zealand's current Director Attestation Regime for banks, by also holding senior managers to account for the prudent management of their bank within their area of responsibility," said Mr Robertson.
Final decisions on the full deposit protection regime and strengthened accountability standards will be announced early next year.