Guest opinion: Bill English says govt providing certainty for investors and taxpayers

By Bill English Extending the retail deposit guarantee scheme until December 2011 - and tightening the criteria - will provide welcome certainty for investors and financial institutions. It is also a balanced result for taxpayers, who have guaranteed about NZ$120 billion of deposits held in 3.5 million accounts since the scheme was established in the depths of the global financial crisis last October. There is no doubt that the instability and deep-seated nervousness afflicting global financial markets last year have abated. Relative normality has returned since the guarantee was introduced in somewhat of a hurry before the election last year. The retail deposit guarantee was entirely appropriate at the time: a year ago, financial markets around the world were in crisis and investors were understandably concerned about the security of their investments after a string of finance company collapses here in New Zealand. But a permanent guarantee was never envisaged. It would have distorted the market by encouraging risk taking by investors - leaving taxpayers carrying the substantial cost of that extra risk. That's why we've also confirmed there will be no further extension beyond December 31, 2011. The retail deposit guarantee, together with the wholesale guarantee for banks, has helped contribute to the stability of the New Zealand banking system through what has been the most challenging global financial and economic period in several generations. The Government's overriding priority has been to ensure that the banking system remains stable and that banks continue lending. We have achieved that. Indeed, New Zealand is one of the few developed countries to have come through the past year without requiring expensive taxpayer-funded bailouts of banks. The cost of these bailouts will be felt in other countries for many years to come. The stability of our banks is now one of our competitive advantages, as we emerge from the recession and move down the road to recovery. I appreciate that investors and the wider financial sector have been calling for the Government to move more quickly in confirming the deposit guarantee's future. Ministers have been equally keen to provide certainty beyond the end of the current scheme in October 2010. But we needed to carefully work through the issues - recognising the interests of investors, financial institutions and taxpayers - and I believe the Government has struck the appropriate balance. We could have ended the scheme completely when it expires on October 12, 2010. But we were mindful that Australia's scheme continues until 2011 and that the market needed time to adjust. At the other end of the spectrum, we could have extended the scheme in its current form for another year. But that would have imposed significant ongoing risk on taxpayers and, arguably, the guarantee should have been more targeted in the first place. That's why the eligibility criteria have been tightened, the fee structure amended to better reflect risk and the size of individual deposits guaranteed reduced. Our decision this week gives investors and financial institutions more than 12 months' notice before the scheme in its current form expires on October 12 2010. And it provides another 14 months for those institutions who qualify for the extended scheme and choose to sign up to it. In the end, most people recognise that these kinds of schemes are designed for exceptional times. Those times are over and it's now appropriate that we move on. Winding down the deposit guarantee was always going to be a challenging balancing act. As I say, I believe the Government has achieved that balance in the best interests of investors and taxpayers. You can read more about the retail deposit guarantee here, or you can view a video of me talking about it in the latest edition of my monthly newsletter Focus on Finance. * Bill English is the Finance Minister of New Zealand.