Reserve Bank of New Zealand DCS guidance: protected deposit hierarchy

Depositor
Compensation
Scheme guidance:
protected deposit hierarchy
June 2025

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2 Depositor Compensation Scheme guidance: Protected deposit hierarchy Introduction

1. The Deposit Takers Act 2023 (the DTA) provides for the establishment and operation of the
   Depositor Compensation Scheme (the DCS). Under the DCS, depositors of a failed deposit taker are eligible to be compensated up to $100,000 per eligible depositor, per deposit taker. Deposit products that can be eligible for compensation under the DCS are referred to as “protected deposits”. The different types of deposit are outlined in the Deposit Takers Regulations 2025 (the regulations). 1
2. The DTA determines how compensation entitlements are paid. In particular, it provides that the
   Reserve Bank of New Zealand (RBNZ) assumes all the rights and remedies that a depositor may have in relation to all or part of a protected deposit, where a compensation entitlement has been paid in respect of all or part of that protected deposit.2
3. In some cases, eligible depositors may have total protected deposits exceeding $100,000
   across different deposits with a failed deposit taker. In this case, section 228 of the DTA (see the
   Appendix) provides RBNZ with the discretion to apportion compensation across the protected
   deposits as it sees fit. The apportionment does not reflect the position in a liquidation.
4. The purpose of this DCS protected deposit hierarchy guidance (the hierarchy) is to indicate
   how we might exercise our discretion to prioritise different types of deposits for DCS compensation under section 228 of the DTA. The hierarchy is not intended to limit the discretion available to RBNZ under section 228 of the DTA but is intended to provide a pre￾failure indication of how the discretion is expected to be applied.
5. The hierarchy groups protected deposits into tiers and ranks in order of priority to enable
   RBNZ to effectively apportion compensation across protected deposits where necessary. A deposit taker may choose to take the hierarchy into account when self-assessing what are protected or insured deposits for other purposes, for example, in complying with DTA standards or making disclosures to foreign regulators.
6. It is not intended that deposit takers would be required to pre-position anything due to the
   existence of the hierarchy.
7. With the exception of any withholding tax liability on accrued interest, any apportionment
   applied does not affect the amount of an eligible depositor’s entitlement to DCS compensation, which continues to be the lesser of their total protected deposits at quantification time or $100,000. 3
8. The hierarchy considers liquidity and accessibility (as defined in paragraph 14 below) when
   determining how compensation should be apportioned across protected deposits.
9. The hierarchy supports RBNZ’s function under section 195 of the DTA to ensure that DCS
   compensation is provided as soon as practicable after RBNZ has issued a specified event notice. ____________ 1 Regulation 5 of the Deposit Takers Regulations 2025 (the regulations). 2
   Section 227 of the Deposit Takers Act 2023 (the DTA).
   3
   Section 203 of the DTA.

3 Depositor Compensation Scheme guidance: Protected deposit hierarchy Deposit hierarchy Protected deposit list
10. Section 193 of the DTA requires deposit takers to publish a list of products that are protected
deposits.
11. Section 192 of the DTA defines protected deposits as New Zealand dollar denominated “debt
securities” that have terms that are governed by New Zealand law and meet the requirements of section 192(1)(c) (additional requirements specified in the regulations).
12. Under regulation 5 of the regulations, a protected deposit (which includes both principal and
interest) must be one or more of the following:
(a) Current accounts and savings accounts, including:

• call debt securities
• call credit union shares
• call building society shares
• credit union savings account products
  (b) Notice account products, including:
• bank notice products
• products that are substantially equivalent to a bank notice product, except that
  they are not issued by a registered bank
  (c) Term deposit products, including:
• fixed term deposit products
• fixed term redeemable building society shares
• credit union fixed term deposit products
  (d) Rights in connection with revolving credit contracts (e.g. in connection with a positive balance in a revolving home loan or credit card contract). Assessment considerations

13. The hierarchy groups protected deposits into tiers and ranks them based on two assessment
    criteria: liquidity and accessibility.
14. Liquidity refers to the feature of certain protected deposits that enables depositors to have
    immediate access to their funds (sometimes on a daily basis). Not having access to liquid funds could harm the depositor if they are unable to meet financial obligations or make purchases. Accessibility refers to whether there are restrictions or limits to the number of transfers or withdrawals that can be made in relation to the deposit account. Note that the concepts of liquidity and accessibility often overlap. Tiers of debt securities
15. Prompt restoration of access to transactional accounts following a failure event is essential to
    preserving public confidence and maintaining financial stability. Material delay in accessing

4 Depositor Compensation Scheme guidance: Protected deposit hierarchy funds would be disruptive not just to the individual depositor but for the wider community and economy.4
16. Accordingly, it is proposed that deposits that are transactional in nature be prioritised over
other types of deposits. These deposits have no maturity period, are liquid and either payable at par on demand or after providing a notice period to withdraw the funds. Both Tier 1 and Tier 2 outlined below are transactional accounts. Tier 1 — Transactional accounts
17. Tier 1 deposits are liquid and readily accessible given their transactional nature. The depositor
is able to make unlimited transfers or payments from the deposit account to another party (including another account of the depositor at the same deposit taker or another institution). They are primarily current accounts and savings accounts as covered by the regulations. 5
18. The frequency with which depositors or account holders can use these accounts is a key
feature of Tier 1 deposits. Depositors do not require prior notice to transfer or withdraw funds from these accounts.
19. Examples of Tier 1 deposits include:

• on-call and current accounts:
• on-call savings accounts that do not require prior notice for withdrawal:
• redeemable shares (if they function as a transactional account in substance):
• revolving home loans, revolving credit facilities and credit cards with credit (positive)
  balances that operate like transactional accounts.
  6
  Tier 2 — Savings accounts with transactional features

20. Tier 2 deposits have transactional features such as being accessible, but there are restrictions
    on withdrawal, or incentives not to withdraw. They are primarily notice account products as covered by the regulations. 7
21. Some transaction accounts, sometimes referred to as bonus interest or bonus saver accounts,
    offer unrestricted access to withdrawals but have other features to encourage savings. This could include a higher interest rate if a minimum balance is maintained or if a minimum number or amount of deposits and no withdrawals are made in a certain period. While classification within the hierarchy of these products will depend on their exact features, 8 we expect that these products will be typically be within Tier 2 — even if the debt security itself is within regulation 5(2)(a)(i) to (iii) of the regulations. ____________ 4 During the Global Financial Crisis, the United States Federal Deposit Insurance Corporation introduced the Temporary Account Guarantee Program (TAGP), which provided unlimited insurance to non-interest-bearing transaction accounts and other low-interest￾bearing accounts to calm depositors and forestall bank runs. This shows that transactional accounts are essential to the economy (by maintaining market liquidity), support public confidence in the financial system and promote financial stability. United States:
    Transaction Account Guarantee Program (yale.edu) 5 Regulation 5(2)(a)(i)–(iv), (x) of the regulations. 6 Note that these products are expected to be treated differently for disclosure purposes under the planned DCS standard for compliance cost reduction purposes, given the small proportion of these products that are expected to have a positive balance but we do not expect to treat them differently in the hierarchy. 7 Regulation 5(2)(a)(viii) and (ix) of the regulations. 8 For example, a product that requires a minimum deposit per month but where the interest rate is not affected by any withdrawals may fit within Tier 1. However, we are not aware that such a product currently exists.

5 Depositor Compensation Scheme guidance: Protected deposit hierarchy Tier 3 — Term deposits
22. Tier 3 deposits are designed to set aside money for future use or to hold money that is not
expected to be used on a regular basis. They have a pre-determined maturity date and earn fixed interest rates. They are primarily term deposit products as covered by the regulations. 9
23. Term deposits are not liquid. They can usually be terminated before maturity, but doing so will
often incur a penalty. While there is no minimum maturity period to qualify as Tier 3 deposit, terms available in the market range from seven days to five years. Most term deposits also require a minimum balance to be maintained. Tier 4 — Accrued interest
24. For the avoidance of doubt, the hierarchy does not provide any guidance on the calculation of
accrued interest, merely its prioritisation when total protected deposits are over $100,000.
25. Protected deposits are comprised of the principal and any accrued interest as at a particular
point in time.10 RBNZ’s apportionment power under section 228 includes the power to apportion DCS compensation between principal and interest. Accrued interest is interest that has been earned by the depositor but not yet paid out or added to the balance.
26. RBNZ may determine the amount of accrued interest by making an “estimate that is
reasonable in the circumstances” if we consider that:
(a) there is uncertainty as to the entire amount of interest that has accrued; or (b) the time required to ascertain the entire amount of interest that has accrued would be so long as to unduly delay the payment of compensation; or (c) the costs and expenses that would be incurred in the calculation made to ascertain the entire amount of interest that has accrued would outweigh the benefit of making the calculation.11
27. Deposit takers have different IT configurations or methods for calculating accrued interest. For
example, in some cases, interest earned in one period is re-invested to earn further interest or updated monthly or upon maturity of the deposit.
28. The principal part of a protected deposit in Tiers 1 to 3 will be prioritised before accrued
interest as this may involve less intervention or steps in calculating an eligible depositor’s DCS entitlement, thus minimising execution risk. As such, accrued interest is treated as Tier 4. Tier 5 — Relevant arrangements
29. Relevant arrangements are arrangements where a protected deposit is held under a regulated
client money or property service,12 or under a trust, scheme or other similar arrangement prescribed by the regulations. 13 The provider of a relevant arrangement is not entitled to DCS ____________ 9 Regulation 5(2)(a)(v)–(vii) of the regulations. 10 Section 192 of the DTA. 11 Section 218 of the DTA. 12
Section 191(2)(a) of the DTA.
13
Section 191(2)(b) of the DTA and Schedule 2 of the regulations.

6 Depositor Compensation Scheme guidance: Protected deposit hierarchy compensation in respect of the protected deposit. 14 Rather, compensation entitlement is calculated at the level of the underlying client.
30. Due to the nature of relevant arrangements, it is expected that calculation of the compensation
entitlement for the underlying client (the ultimate eligible depositor) would be slower. This is because the failed deposit taker will often not have (and is not required to have) the data to identify the underlying client and will have to request further information from the provider of the relevant arrangement.
31. Because of the slower process in determining the underlying client (eligible depositor) in
relevant arrangements, protected deposits held in the name of relevant arrangement providers have the lowest priority, Tier 5, in the hierarchy. This will ensure that payment is not delayed for Tiers 1 to 4 while waiting for Tier 5 information to be available.
32. Furthermore, accrued interest on relevant arrangements will be of a lower priority than the
principal amounts of relevant arrangements. However, we do not think it is necessary to split Tier 5 into an additional lower tier to account for this, since the priority of accrued interest on relevant arrangements compared to principal relevant arrangement amounts is very unlikely to be a material issue.
33. The regulations prescribe captive cash PIEs (as defined in the regulations15) as a type of
relevant arrangement. RBNZ expects to apply the hierarchy differently to captive cash PIEs compared with other relevant arrangements. For captive cash PIEs, the failed deposit taker will often already have the necessary data to determine the underlying client. For this reason, RBNZ expects to apportion the protected deposits in which captive cash PIEs are invested according to the standard hierarchy outlined in Tiers 1 to 4 above, instead of under Tier 5 with the other relevant arrangements. Example of protected deposit hierarchy operation
34. Set out below is an example of how the hierarchy operates.

---

14
Section 208 of the DTA.
15 Regulation 3 of the regulations, definition of captive cash PIE.
Protected deposit hierarchy
Depositor A has $75,000 in a current account and $50,000 in a term deposit with Bank B for a total sum of $125,000. Bank B fails and depositor A is entitled to receive $100,000. Using the hierarchy, depositor A is compensated as follows:

• $75,000 from the amount represented in the current account
  (full compensation); and
• $25,000 of the term deposit (partial compensation).
  This means that the amount represented in the current account (tier
  1) is given priority over the amount represented in the term deposit.
  As the $100,000 limit is reached during Tier 3, no accrued interest will form part of the compensation payment.

7 Depositor Compensation Scheme guidance: Protected deposit hierarchy Summary of the protected deposit hierarchy approach Tier Features Examples Tier 1 — transactional accounts Typically as set out in regulation 5(2)(a)(i) to (iv) and (x) Liquid, i.e. payable at par on demand (no pre-determined maturity period or restriction imposed before withdrawal) Accessible, i.e. there is no limit on the number of transfers or withdrawals May or may not be interest-bearing Fees may or may not be charged for maintaining the account May be accessed by electronic order or instructions or similar instruments to pay third parties or transfer funds Current accounts (call debt security, call credit union share, call building society share); on-call savings accounts or similar; rights in connection with revolving credit contract (e.g. a revolving home loan or credit card) Cash PIEs in a captive cash PIE Tier 2 — savings accounts with transactional features Typically as set out in regulation 5(2)(a)(viii) and (ix) Requirement for prior notice before withdrawal or there are restrictions on the number of withdrawals per period No specified maturity period Interest-bearing subject to maintaining a minimum balance Fees or penalties may or may not apply Notice saver accounts Bonus interest/saver accounts Notice PIEs in a captive cash PIE Tier 3 — term deposits Regulation 5(2)(a)(v) to (vii) Pre-determined maturity date Earn fixed interest rate Not liquid, i.e. not callable on demand by the depositor, but may be terminated before maturity, often incurring a penalty May require a minimum balance to be maintained Term deposits (including fixed term deposit, fixed term redeemable building society share, credit union fixed term deposit product) Term deposit PIEs in a captive cash PIE Tier 4 — accrued interest Accrued interest on Tiers 1–3 Accrued interest Tier 5 — relevant arrangements Relevant arrangements where the deposit taker might not hold details about the underlying client Also includes any accrued interest on these accounts Solicitors’ trust accounts

8 Depositor Compensation Scheme guidance: Protected deposit hierarchy Other considerations Joint accounts
35. For the purpose of calculating any DCS compensation entitlement, joint accounts are
separated so that each holder of the joint account becomes the holder of their equal share within that account.16 For example, two holders of a joint account would each be attributed 50% of the deposit in that account alongside any individual account entitlements they may have.
36. Therefore, the hierarchy does not specify a different treatment of joint accounts compared to
individual accounts.
Treatment of deposits within the same tier
37. RBNZ does not intend to collect maturity data on individual deposits so will be unable to rank
deposits by maturity. There are also additional complications with such a ranking, for example, Tier 1 products not having a maturity date, Tier 2 products potentially having different notice periods (which RBNZ also likely won’t have visibility of), and Tier 3 products having original maturity and remaining maturity lengths.
38. Within each tier, we intend to treat all deposit products equally, which means compensation will
be calculated on a pro-rata basis. Below is an example of how pro rata apportionment might work. ____________ 16 Consistent with Section 204 of the DTA. Pro rata apportionment example Depositor A has a total sum of $125,000 with Bank B, comprised of:

• $75,000 (60% of the total sum) in a 9-month term deposit due
  to mature on 30 September 2027; and
• $50,000 (40% of the total sum) in a 3-month term deposit due
  to mature on 31 October 2027.
  Bank B fails on 31 August 2027 and depositor A is entitled to receive $100,000 in DCS compensation. On a pro rata basis, depositor A is compensated as follows:
• $60,000 of the 9-month term deposit (60% of $100,000 total
  DCS compensation); and
• $40,000 of the 3-month term deposit (40% of $100,000 total
  DCS compensation).
  As the total in Tier 3 exceeds $100,000, depositor A does not receive compensation for accrued interest.

9 Depositor Compensation Scheme guidance: Protected deposit hierarchy
Appendix
Please find below an extract of section 228 of the Deposit Takers Act 2023. 17 228 Bank may apportion compensation to determine respective rights and remedies (1) This section applies if— (a) the Bank pays compensation to, or on account of, an eligible depositor (A) in respect of 2 or more protected deposits issued by a licensed deposit taker (B); and (b) the amount that is paid is less than the total amount referred to in section 203(1)(a). (2) The Bank may apportion the compensation to 1 or more of the protected deposits in the manner that the Bank thinks fit. (3) The Bank’s power includes the power to apportion the compensation between principal and interest. (4) The Bank’s apportionment is binding on each relevant person, B, the Bank, and any third parties for the purposes of determining rights, obligations, and remedies in respect of the protected deposits. ____________ 17 Note that the legislation features an example which does not apply a pro-rata basis as suggested from paragraph 35. Both approaches continue to be available to RBNZ under section 228(2).