People with money in the bank will soon have a guarantee of most of their money.
Kiwi households have around $170 billion on deposit with banks, but currently, should a bank fail in New Zealand, there's no guarantee the Government would bail it out.
Under the Reserve Bank's Open Bank Resolution scheme (OBR), depositors at a failing bank might have to take a "haircut" with some of their money being taken to recapitalise their bank, and get it open for business again quickly.
New Zealand is unusual by international standards in not having a deposit protection scheme for money in the bank.
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The decision comes as part of phase two of the review of the Reserve Bank Act.
"Now is the right time to check we have the tools to make sure banks meet their obligations to New Zealanders, and the powers to enforce them," Finance Minister Grant Robertson said.
"The Government is also making sure New Zealand follows international best practice for promoting public confidence in our banking system, including on the issue of depositor protection.
"Our banks are safe and sound. 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."
The Government is proposing a limit between $30,000 and $50,000 for the deposit protection regime. This would cover 90 per cent of individual bank deposits in New Zealand, which is similar to international schemes. It follows consultation with the sector.
"Overseas experience shows that bank failures can be the result of a few bad decisions that normal bank customers had no influence over and no idea about. A deposit protection scheme will help protect customers like a young couple saving a deposit for a house, people saving for their retirement, or the small business operator who keeps money aside for a rainy day."
Robertson said if the scheme was designed well, bank levies should be able to cover the cost. Depositor protection would work alongside the OBR rules, he said. The details of the scheme are currently being worked on.
"That provides potentially a high degree of support for depositors."
Ardern said New Zealand would be one of few countries to have both regimes in place. "It provides a degree of protection many other jurisdictions wouldn't have."
Banking expert Claire Matthews, of Massey University, said it was likely to increase costs for bank depositors.
Internationally, guarantees such as this were not free for the banks. "You can argue the big banks can cover that cost within their level of profit currently but I would expect them to pass it on in some way. Smaller banks don't have that same capacity so that will increase the cost to deposito

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