Deposit insurance for New Zealand: New scheme for the banking industry

Abstract

Using recent data from the New Zealand banking industry, this paper examines the most important factors that determine bank risk. We use a sample of 24 banks in New Zealand from the period from 2012 to 2021, using quarterly data. The risk-based deposit premium is preferable to be implemented in New Zealand as it calculates the risk attached to each bank as the flat rate is simpler yet imposes moral hazard. Thus, we use a weighting method based on statistical learning models using gradient boosted model to predict the most important variable that explains bank risk. The result shows that capital equity is the most important variable that can predict bank risk that weighs more than 40%. This research indicated that a risk-based premium is preferable and fairer than a flat-rate premium to reduce moral hazard (Bloecher et al., 2003). This study supports the deposit insurance schemes in New Zealand as a part of the system to maintain banking stability (Cerrone, 2018)