Taxpayers' now 'only' on the hook for NZ$3.7 billion worth of bank wholesale debt, down from peak near NZ$11 billion in 2009

By Gareth Vaughan

Taxpayers' liability for wholesale bank debt under the Crown Wholesale Funding Guarantee Scheme had dropped to NZ$3.7 billion by the end of the Crown's last financial year from a peak of NZ$10.7 billion in November 2009.

The Government's financial statements for the year to June 30, released yesterday, show a liability of NZ$3.7 billion as of June 30. No provision has ever been made for Crown losses through the Wholesale Funding Guarantee Scheme with Treasury saying the probability of loss is considered remote.

Launched by then-Finance Minister Michael Cullen at the height of the global financial crisis on November 1, 2008, the scheme was utilised by ANZ New Zealand, BNZ, Westpac NZ and Kiwibank, but not ASB. As of their latest General Disclosure Statements, covering the period to June 30, only ANZ disclosed its specific remaining balance under the scheme, saying it had debt securities with a carrying value as
at June 30 of NZ$341 million guaranteed by the Crown.

Although the scheme was closed on April 30, 2010, bank debt issued under it continues to carry a taxpayer guarantee until it matures, with the last of this - US$71 million from ANZ - not due to mature until November 19, 2014. That's just after a taxpayer guaranteed A$250 million Kiwibank debt issue, the state owned bank's only issue under the Wholesale Guarantee Scheme, matures on October 20, 2014.

Taxpayer liability under the scheme peaked at NZ$10.7 billion in November 2009.

Although the Australian parents of New Zealand's big banks bought back some of their debt guaranteed under Australia's equivalent scheme, the New Zealand banks haven't, and won't, do this. That's because the Australian banks have had to pay monthly fees on all their outstanding guaranteed debt. In contrast the New Zealand banks paid Treasury fees upfront when each guarantee was granted, (there were 25 in total), and Treasury says they're non-refundable.

When the scheme was closed, Finance Minister Bill English said the government would receive almost NZ$290 million in fees in total from it. The Government received a fee from each participating bank based on its credit rating and the term and amount of guaranteed debt issued.

The scheme was initiated as an opt-in wholesale funding guarantee facility. At the time Treasury and Cullen said the objective was to facilitate access to international financial markets by New Zealand financial institutions, in a global environment where international investors were highly risk averse and where many other governments had offered guarantees on their banks’ wholesale debt.

Banks using the guarantee have to maintain a minimum Tier 1 capital adequacy ratio of 6%, above the normally required 4% ratio, to help protect the taxpayer's position as guarantor.

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