KEY POINTS:
Finance Minister Bill English says he is keen to find out what banks plan to do in terms of lending now they have a guarantee scheme in place.
Mr English told Parliament today that measures taken to stabilise the financial markets will go a long way to maintain confidence in the sector.
In a ministerial statement, Mr English said the Government was now guaranteeing $125 billion in retail bank deposits.
So far no banks had signed up for wholesale guarantees, but it was estimated that the Government could be exposed to up to $150 billion in liabilities if the offer was taken up.
Mr English told journalists after the ministerial statement that it was still not known how the guarantee would affect banks' lending behaviour.
While there was a chance they might engage in risky behaviour, currently the issue was whether they were going to be too cautious in their lending behaviour.
"If we have an economy we are trying to get off the floor then access to credit is important," Mr English said.
"If the Government has provided a guarantee then you would expect the banks to be keen to do profitable business and we would be keen to now what those plans are."
Other governments around the world are encouraging banks to begin lending again, but Mr English said he would not be telling them how to run their business.
Mr English told MPs that decisions by his predecessor Michael Cullen had been taken after Parliament had been dissolved and if it had been sitting a statement would have been made.
"Since the House last met on 26 September 2008, the world's financial markets have experienced considerable disruption. In particular, confidence in the global financial system has deteriorated markedly and credit markets have become dysfunctional," Mr English said.
"Linked to this, global share markets have fallen sharply, and economic conditions in many countries around the world have deteriorated rapidly. The outlook remains difficult."
Mr English praised Dr Cullen for his actions and said like him the moves had been a necessary evil.
The greatest challenge for governments around the world would be how they managed the exit from guarantee schemes.
The statement to the House came as the Reserve Bank's briefing to Mr English was released.
It described the financial crisis as like no other in recent memory and been "likened to the biggest episode of instability since the start of World War 1 - eclipsing comparisons with even the 1929 stock market crash".
Mr English told journalists later that banks had been "looking pretty hard" at the wholesale guarantee especially in light of the charge that they had to pay to get coverage.
"My guess is that they are hoping the credit markets will reopen and they won't need to get the guarantee," Mr English said.
Policy work was starting on how to exit from the guarantee scheme which was meant to expire in two years and there would probably be a need to co-ordinate with Australia.
It was possible that a scheme of some sort might have to remain in place, but this was largely dependent on what happened in other countries.
Mr English praised Dr Cullen for his consultation over the issue with other parties and he said this practice would continue with him in the portfolio.
- NZPA
