Govt increases provision for finance company failures to NZ$899 million

The government has again increased its provision for defaults under the deposit guarantee scheme from NZ$863 million in September to NZ$899 million in October, its accounts released today by Treasury show. The forecast provision at the time of the 2009 Budget in May had been NZ$831 million. The figure is for net provisions after expected recoveries. However, Treasury noted the uncertainty that surrounds the provision figure, given "a significant range of outcomes are possible under the scheme in terms of which entities may default and the eventual loss to the Crown following an event of default". At the end of October, there were 73 institutions covered by the scheme, with NZ$133.1 billion guaranteed. The provisions have been made for institutions with less than NZ$5 billion in deposits. Here are Treasury's comments on the provision:

As at 31 October 2009, 73 financial institutions had joined the scheme and deposits totalling $133.1 billion had been guaranteed. This is the maximum exposure and does not include any offset resulting from the recovery of the remaining assets of the financial institution in the event the guarantee is called upon. The Crown assesses the potential loss to be associated with the entities that hold significant deposits (ie, greater than $5 billion) as being remote. It is recognising the revenue received from these institutions over the guarantee period and has made no provision for any loss associated with these entities. For other entities within the scheme (ie, entities that hold deposits less than $5 billion) a provision has been made both when guarantees have been triggered and to provide for losses that are more likely than not to occur. Guarantees have been triggered for two entities and the estimated cost of $34 million associated with these guarantees has been included in the statement of financial performance. The Crown also continually updates the likelihood of further default actions triggering the guarantee and assesses the expected loss given default. Based on these assessments, the Crown has provided for a net expected loss given default of $899 million as at 31 October 2009 being the cost of future payments under the scheme after expected recoveries. While the provision represents a best estimate of likely loss, a significant range of outcomes are possible under the scheme in terms of which entities may default and the eventual loss to the Crown following an event of default. This reflects the significant uncertainty as to the value that can be realised from an entity's assets following an event of default. Except as provided on the Treasury web site, further information on the Retail Deposit Guarantee Scheme cannot be provided due to commercial sensitivity.