Warning for finance companies

Bill English says firms must meet new standards to be part of guarantee scheme. Photo / Mark Mitchell

Finance Minister Bill English yesterday warned finance companies to sort themselves out as he considers what to do with the retail deposit guarantee scheme.

The scheme, introduced by the previous Labour-led Government during last year's election campaign, is set to run out in October 2010.

The opt-in scheme covers all retail deposits of participating New Zealand-registered banks and retail deposits by locals in non-bank deposit-taking entities. This includes building societies, credit unions and deposit-taking finance companies.

The deposit guarantee scheme does not include related party liabilities.

In an interview yesterday, English indicated he was considering what would happen to the scheme after October next year, particularly in how it affected the non-bank deposit takers, such as finance companies.

"They are keen to know what we are considering. They tell me people are putting money into them until the end of September 2010. That build-up could all disappear after that."

The choices for English were: stopping the scheme, extending it, or lining it up with Australia - which was particularly important for New Zealand banks.

Reserve Bank of Australia Governor Glenn Stevens said this week that it would soon be time for banks in Australia and abroad to begin borrowing funds in wholesale markets without the backing of government guarantees.

"I think it will soon be time for banks everywhere, including here, to borrow in their own right," he said.

He noted banks would soon need to reduce their reliance on government guarantees to support fund-raising activity in wholesale credit markets.

"It would make sense for Australian banks, which have accounted for 10 per cent of global issuance of government guaranteed bank debt over the past nine months, to step up their efforts to do so," he said.

English said the wholesale guarantee scheme in New Zealand was taken on an issue-by-issue basis and he expected the scheme to wind itself down as banks started borrowing offshore on their own records.

However, the retail scheme would change. The Government wanted to minimise its losses. At present, if an institution got into trouble, the taxpayers picked up the tab.

The Government also wanted to ensure the system did not become unstable as the stability of New Zealand's financial system had been an advantage.

Now, everyone had to take a guess at what the asset values were backing up a finance company, he said. The kinds of assets behind those companies were not easily traded in these times.

As the economic recovery started, those asset values could increase, making it easier for deals.

But one thing he could guarantee was that whether the scheme ended or changed, things would be more challenging for finance companies wanting to be part of the guarantee, English said.

"You have to keep in mind that before the guarantee runs out, these organisations have to meet the Reserve Bank's new standards for non-bank deposit takers."

Those new standards had been coming in for 12 months and required the institutions to get a credit rating and meet liquidity requirements.

"These institutions have to sort themselves out and we are keen to see signs they are sorting themselves out. We don't want them sitting there thinking the Government will fix it all for them." A guarantee was always a temptation for investors, English said.

- OTAGO DAILY TIMES