Banking expert says Kiwis' deposits would not be protected if NZ bank was to collapse

A banking expert says Kiwis' deposits would not currently be protected if a New Zealand bank was to collapse after a $300 billion American bank closed.

The collapse is the largest bank failure since the Global Financial Crisis in 2008 and comes after a rush of withdrawals from Silicon Valley Bank in California.

Tech companies have been primarily affected and Kiwi firm Rocket Lab had $38 million invested.

Massey University Banking Expert Claire Matthews told AM host Ryan Bridge that Silicon Valley Bank's failure "is a reminder that banks collapse and even big banks collapse".

Matthews said Silicon Valley Bank's collapse shows Aotearoa's banks are not immune to failure because it "is a very large bank compared to our New Zealand banks".

Matthews told AM profits made by banks are important because, in the case of a crisis, the bank is able to manage it. 

"Then they've got the capital and the buffer to draw on to make sure that they can continue to operate and that's why they need to make profit."

The banking expert said indications in the United States are that after the initial shock of its collapse, there isn't expected to be widely felt effects. 

"Even though it's quite a large bank it's quite a focused bank, it's a niche player and there's not expected to be widespread effects, so it's not likely to be any different in New Zealand."

Matthews said she hadn't heard of Silicon Valley Bank before it collapsed "which suggests that it's not a bank that a lot of people are dealing with". 

What would happen if a bank collapsed in NZ? 

Matthews told AM Kiwis' deposits would not currently be protected if a bank was to go into receivership and liquidation.

"Its loans which are its assets have to be sold, recovered, the funds got back and then the depositors are paid out and it all takes time."

In the case of a Kiwi bank collapsing, Matthews said all deposits would be frozen until the bank gets resolved.

Countries like the US and Australia have insurance for deposits of up to $250,000 and a Parliamentary bill due to be reported from select committee is considering $100,000. 

Matthews told AM while $100,000 seems "a little low" the idea of deposit insurance is to cover the bulk of people. 

"It's not expected to cover everything, people with larger amounts are expected to think about how they're doing banking and where they are putting their money a little bit more than somebody who has got less," Matthews said. 

"But it's about making sure most people can continue to operate when the bank fails."

Watch the full interview above.