David Cunliffe grills Bill English on deposit guarantee

1. DAVID BENNETT (National"”Hamilton East) to the Minister of Finance: What advice has he received on extending the retail deposit guarantee scheme? Hon BILL ENGLISH (Minister of Finance) : I have received advice that the extension of the scheme until 31 December 2011 provides certainty for investors and institutions. The alternative was to allow the scheme to lapse on 12 October 2010, which would have created a high degree of uncertainty and could, in turn, have resulted in a loss of confidence in some parts of the finance sector, thereby undermining financial stability. David Bennett: How is the extended scheme consistent with new Reserve Bank requirements? Hon BILL ENGLISH: In the commentary on the scheme there has been some confusion about the distinction between the Reserve Bank requirements and the deposit guarantee scheme. Last year this Parliament passed amendments to the Reserve Bank of New Zealand Act that require all non-bank institutions with deposits of over $20 million to obtain a credit rating from a recognised agency by 1 March 2010. That is currently the law, regardless of the deposit guarantee scheme. The deposit guarantee scheme extension will simply pick up the credit ratings that institutions already have. If they have a minimum of a BB rating, they will be eligible for the scheme. If they cannot get a credit rating by March 2010, then that is a matter they will have to deal with with the Reserve Bank, regardless of the Government guarantee. David Bennett: How is the extended scheme fairer to participants and taxpayers? Hon BILL ENGLISH: The original scheme was put in place under duress at the beginning of the financial crisis. We have had the opportunity to refine the scheme when it is extended, by introducing a new pricing system based on the institutions' risk profiles. It will be fairer to participants, because it is designed to avoid a situation where low-risk institutions are essentially subsidising the activities of higher-risk institutions. Hon David Cunliffe: Does the Minister agree with sharebroker Chris Lee that there will be "no chance of many of the little finance companies getting a BB credit rating in the next 12 months" and with KPMG partner Godfrey Boyce that "Very small financial institutions are going to struggle to achieve that credit rating."; if so, does he still feel he has struck the right balance by limiting their eligibility while giving the larger banks an opt-out? Hon BILL ENGLISH: As I explained earlier, already on the books there is a requirement for financial institutions to get a credit rating by 1 March. I understand that if they do not get a credit rating, then they will either be prosecuted or have to negotiate an exemption with the Reserve Bank if they have deposits of over $20 million. That is a requirement that this Parliament passed last year, independent of the deposit guarantee.