KEY POINTS:
The Government, the Reserve Bank and the Treasury could not be accused of rushing into the wholesale funding guarantee at the weekend for banks and other investment-grade financial intermediaries. It comes nearly three weeks after the retail deposit guarantee to protect domestic savings. The far greater potential liability of insuring international borrowings warranted careful consideration, well removed from the pressures of an election campaign.
That has happened. The National Party leadership has been kept well-briefed on the Finance Minister's discussions and neither side has sought to make political capital from the economic distortions and "moral hazard" inherent in any removal of risk from private investment.
There was never much doubt from the moment the Australian Government guaranteed its banks' wholesale fundraising that New Zealand would have to do something similar. Our largest banks are Australian subsidiaries and while the parent banks are said to be as sound as ours, they could not be expected to make up any shortfall the subsidiaries might suffer if they had to refinance without the New Zealand Government's guarantee.
The subject is a stark illustration of our economic integration with Australia and the effect Australian decisions can have here. The Rudd Government was very quick to adopt wholesale and retail banking guarantees when European countries resorted to them. The Europeans were responding to some actual bank failures; no such failures have threatened banks in Australia and New Zealand.
Banks in this part of the world appear not to be exposed to the bad debt infecting the United States financial system and some of those in Europe and Asia. Had the Rudd Government paused as long as ours has, it is possible the absence of panic measures in this part of the world might have been noticed. We need to pay more critical attention to decisions in Canberra that can damage us directly.
More careful consideration in Wellington has produced a guarantee that charges fees designed to ensure financial institutions think carefully in turn about whether they really need a guarantee to raise funds over the next few months. They should incur the expense of the guarantee only if they find it necessary and only for as long as necessary.
The Treasury and the Reserve Bank warn that the fee will be reviewed regularly and may be adjusted for new issues in light of experience with the scheme. There is plainly a great deal of discomfort in Wellington even now and we may be confident the facility will be provided not a moment longer than international conditions warrant it.
In addition to the fee, banks granted the guarantee will be required to maintain a 2 per cent capital buffer additional to the 4 per cent already required of them. This should present no difficulty, all of them have this level of capital at present. But the added buffer is the least that ought to be required to reduce the public risk.
In return for their public cushion the banks have undertaken to deal gently with mortgaged home owners who find themselves unable to service their loans in the months ahead. Their undertaking, agreed in an exchange of letters with Finance Minister Michael Cullen, might involve capitalising interest payments for a period or some other temporary suspension of payments for those who seem capable of restoring their incomes fairly quickly.
If that sounds ominous, it is some comfort that politicians and officials have not panicked over the wholesale financing problem. Their caution encourages confidence.
