KEY POINTS:
Public fears over the safety of their savings may have been assuaged but the Government's hastily drafted deposit guarantee scheme has stoked fears of a "horrendous mess" in the finance company sector and other investment markets.
The scheme announced on Sunday sees the Goverment guaranteed the deposits of banks, building societies, credit unions, finance companies and other deposit-taking institutions.
By late yesterday all the major banks along with two finance companies had opted into the scheme which is free for companies with less than $5 billion in deposits.
The controversial decision to extend the scheme's coverage to finance companies is widely believed to be intended to prevent a flight of capital from finance companies into government guaranteed bank deposits.
However details, including whether finance companies who have already breached their trust deeds would be eligible if they cleaned up their act, have yet to be released.
A Reserve Bank spokesman yesterday said the bank and Treasury were working on this and other aspects of the scheme but he could not say when further information would be released.
Victoria University professor of economics and finance Roger Bowden said there were a lot of unanswered questions about the scheme, but should it be extended widely to finance companies it would create "a horrendous mess".
With an explicit government guarantee, finance companies who generally make riskier loans and consequently pay higher interest rates "now need pay no more than the banks".
Meanwhile larger banks, including Kiwibank, which have more than $5 billion in deposits will have to pay a fee to participate in the scheme unlike their smaller and riskier finance company counterparts for whom it is free, effectively subsidising them.
"It's screwed the natural pricing to hell and back," said Bowden. "The banks are entitled to very annoyed.
"Of course, there's also going to be a huge backlash among the poor people who have lost money in finance companies in the past."
Insurance and Savings Industry Association chief executive Vance Arkinstall said the scheme was "a very good precaution" to ensure public confidence in the banking sector did not slip further but "because it's been rushed in of necessity there are a number of downstream impacts.
"We're finding the call centres of fund managers are being flooded by calls from people wanting to know whether managed fund products are going to be guaranteed. I think we're going to see a huge switch as people move their money from those managers who are not subject to the guarantee to those who are. That's certainly not a result that was intended and they've got to find a way to sort that out. There's got to be some clarity and quickly."
While BNZ economist Stephen Toplis also had concerns that the scheme could result in an inappropriate allocation of capital, his bigger immediate concern was its lack of wholesale funding guarantees which were largely universal offshore, including in Australia.
"For many in the banking sector it means that the recent regulatory changes have made matters more, not less difficult."
Toplis said the core banking sector raised about 40 per cent of its funding from wholesale markets. While the sizeable overseas proportion of this had largely dried up due to the credit crisis, banks were still able to raise cash from domestic institutions.
"Now those institutions are querying whether they should throw their money at the New Zealand banking sector or the now government guaranteed institutions offshore."
JOINING UP
Who's opted in to the Government's deposit guarantee scheme.
* ANZ-National
* Westpac
* BNZ
* ASB Bank
* Kiwibank
* TSB Bank
* SBS Bank
* UDC Finance
* Marac
