KEY POINTS:
The Reserve Bank and Treasury have moved to allay some of the concerns around the new deposit guarantee scheme including the prospect of stricken finance companies jumping aboard and saddling the taxpayer with the bill in the event of their collapse.
While it is generally seen as a
welcome measure to restore public confidence in the banking system, concerns about the scheme have included speculation that struggling finance companies may gain coverage and that it would distort the pricing of risk in fixed interest investment markets.
Large banks which have to pay a fee under the scheme complained they would effectively subsidise smaller riskier institutions.
Late yesterday, the RBNZ and Treasury released further details including a tightening up of the entry criteria for non bank financial institutions including finance companies.
The criteria has been amended to:
* Limit the potential for stripping out of funds through, for example, dividends, or payments to related parties.
* Increase reporting requirements and to allow the Crown to appoint an inspector.
* Enable an assessment of whether business behaviour is taking place that would then result in breach of the terms of the guarantee.
Furthermore, the RBNZ and Treasury will now require unrated finance companies or those rated below BB to pay a hefty 3 per cent annual fee on deposits. All new entrants to the scheme will need to be rated BBB- or better.
Some of the concerns around the scheme's coverage of finance companies were sparked by reports that Hanover Finance, which froze interest and principal repayments to 16,500 investors owed $554 million in July, was considering applying.
While the Reserve Bank said the scheme would not apply retrospectively to institutions currently in receivership, operating under a moratorium or that have suspended payments to investors, it did not discount the possibility of coverage for firms currently in breach of their trust deeds that are able to bring themselves back into compliance.
Hanover Finance chairman Greg Muir yesterday confirmed the company had considered possible implications of the scheme for its recapitalisation plan which is still being readied for presentation to trustees and investors and may see the company again achieve compliance with its trust deed.
"It's not clear right now what the rules would be in respect of a company that comes out of moratorium and we would expect that to be clarified between now and when we put our proposal to the vote.
"That would certainly be something that you'd be wanting to talk to investors about at the time of the vote, particularly if it was then possible for you to join the scheme."
However, yesterday before the release of the further details, Reserve Bank spokesman Mike Hannah said even if companies previously in breach of their trust deed did again comply, "they still have to meet strict elegibility criteria, and believe me, they will be strict".
Meanwhile, the $150 billion deposit guarantee, which is believed to represent the Government's largest single contingent liability, would not affect New Zealand's sovereign credit rating, agency Moody's said yesterday.
"We have always viewed bank liabilities as an implicit contingent liability of the Government," said analyst Steven Hess. "Now they've become explicit it doesn't really change our overall credit analysis of the New Zealand Government."