Deposit scheme to be extended

Bill English. Photo / Mark Mitchell

The Government yesterday extended the retail deposit guarantee but has balanced that with tougher conditions to aid an "orderly exit" from the scheme over the next 2 years.

The current scheme, put in place by the previous Government last October during the depths of the credit crisis, helped prop up the finance company sector by providing investors with an assurance they would get their money back, even if a company failed.

It was due to have ended on October 12 next year but Finance Minister Bill English said yesterday an altered version of the scheme would take effect the next day and expire on December 31, 2011.

"Crown retail guarantees have helped maintain confidence in New Zealand's financial institutions," said English. "However, they also distort the market and impose costs."

While market watchers warned of a fresh funding crunch for finance companies as the original deadline neared, they pointed out the distortionary effects English referred to.

The banking sector, being well capitalised and subject to Reserve Bank oversight, is far less prone to failure, but it has nevertheless borne most of the costs in terms of fees charged for coverage.

And banks have been forced to compete with finance companies for deposits at the same time as significantly underwriting their rivals' investors' risk.

English said the Government considered doing nothing "but on balance felt it was too early to end it", being mindful, among other things, of the possibility of further turmoil in international financial markets.

While the scheme has been extended, it will also become more costly and difficult to access for finance companies and has been designed to mesh with the new regulatory environment for non-bank deposit takers. Under Reserve Bank oversight, those with deposits over $20 million are obliged to obtain a credit rating from one of the major ratings agencies.

Under the extended deposit guarantee, only companies with a BB credit rating or higher are eligible.

At that rating, they will have to pay a fee of 150 basis points a year on any growth in their deposits since the scheme was originally launched last year. The fee reduces for companies with better credit ratings.

New Zealand's biggest finance company - ANZ-owned UDC - at present has an AA rating, which means it will pay 15 basis points on post-October 2008 growth in deposits.

But the new scheme also increases fees for banks who, assuming they are AA-rated, were paying 10 basis points on new deposits but will pay 15 basis points after October 12 next year.

English said some institutions may choose not to apply for the extended scheme and others wouldn't meet the application criteria.

However, the scheme was "not ultimately about institutions but about the government objective of achieving financial stability" and it had been successful in that regard.

"The planned extension strikes a balance between maintaining New Zealanders' confidence in the financial system but signalling an orderly exit from the scheme."

English said the Government had paid out $68 million to investors in failed finance companies since the scheme's inception and had gathered $64 million in fees in the first eight months, mostly from banks.

English said the Government had considered risks to New Zealand's sovereign credit rating from this potential liability but had decided "that we're in reasonable enough shape with our credit rating that on balance it's better to underwrite financial stability".

NEW VERSION
* The retail deposit guarantee has been extended to December 2011 and is now in sync with Australia's scheme.
* But more stringent conditions will apply from October 12 next year, including:
* Finance companies and other non-bank deposit- takers must have a BB rating or better to qualify.
* Fees for coverage will go up, both for finance companies and banks.
* The maximum payout per depositor will drop from $1 million to $500,000 for bank customers and $250,000 for finance company investors.