KEY POINTS:
Forget the usual cliches about shutting the stable door after the horse has bolted. Michael Cullen's approach to the crisis of confidence, which continues to seriously impact the finance companies sector, is to announce the Government has found a stable door but doesn't intend to close it, even partially, until 2009.
The range of measures Cullen announced last week will go some way to ensuring investors in non-bank deposit-taking institutions, particularly the troubled finance companies, can have greater confidence in the sector.
But by delaying the implementation date instead of putting legislation on to a fast-track programme, he is displaying an extraordinarily off-hand response to the worries many New Zealanders now have about the health of the finance companies in which they have deposited their savings.
Meanwhile, thousands who already have their nest eggs frozen through the wave of finance company receiverships can only hope the receivers will be able to realise sufficient assets to cover at least some of the funds they have deposited in the sector.
Cullen's approach appears to be mirrored by that of Commerce Minister Lianne Dalziel, who has repeatedly pointed out (after the fact) that New Zealanders who sought above-average returns on their deposits should have taken an investor-beware approach.
People should read prospectuses in detail, find out more about the health of the finance companies seeking their deposits, and assess their own level of risk before parting with their precious dollars.
If it was as simple as Dalziel implies, why bother with introducing legislation to regulate finance companies? Just issue more investor-beware warnings.
The reality is that officials have been pointing out for years that finance companies are not under the same disclosure obligations as banks. Investors find it difficult to get timely, risk-focused information to help them, or their advisers, evaluate risk.
While the Ministry of Economic Development downplayed the systemic risks from the failure of financial institutions, it has long been concerned that instability in the non-bank deposit-taking sector could tarnish the international reputation of the financial system.
This advice, which was was contained in a report this year, put the rationale for finance company regulation and outlined many of the measures Cullen has announced.
In future, finance companies will have to:
* Get credit ratings from Reserve Bank-approved agencies.
* Sport minimum capital of $2 million.
* Maintain capital ratio.
* Meet restrictions preventing them from lending to persons related to the deposit-takers.
* Meet fit and proper requirements for the directors and senior managers.
Those finance companies which have capital of less than $10 million will not have to seek credit ratings but will have to disclose prominently that they are unrated.
Some of these measures fall decidedly short of the ministry's recommendations.
Some finance companies and the NZX have been calling for the Government to move faster.
Surely it would be a simple measure to require all finance companies to immediately implement restrictions preventing them from lending to persons related to the deposit-takers, and making any inter-company loans transparent? The latter point appears to feature in the collapse of Bridgecorp.
And introducing fit and proper requirement for directors and senior managers is surely a simple measure to implement quickly? Likewise, mandatory credit ratings for institutions with more than $10 million capital.
Cullen says there will be a transition phase for institutions to meet the new requirements, but given the basic measures have been telegraphed since December 2005, there should be no quibbles in moving to a fast-track process.
The growth in the sector has been rapid.
In December 2003, non-bank deposit taking and credit institutions had total assets of more than $15 billion, about 7 per cent of the size of registered banks.
By December last year, the asset size had swelled to $29.5 billion.
In 2004, the Reserve Bank said the generally small size of these institutions suggested financial distress or failure within the group posed a small risk to the stability of the financial system overall.
But widespread or severe distress could weaken domestic and international confidence in the New Zealand system and impact on the consumer finance market.
For these reasons we maintain oversight of the sector, although this does not involve us in regulating or supervising the individual institutions.
The Reserve Bank appears to have been sleeping just as much as the Government on this score.
Surely it's not too difficult for it to move quickly and implement some of Cullen's prudential supervision measures, or is it also afflicted with Wellington's version of sleepy sickness?
