Have your say: Govt guarantees all deposits for 2 years

Labour Prime Minister Helen Clark announced today at her election campaign launch that her government had agreed to implement a deposit guarantee scheme for all deposits in all banks, building societies and finance companies for two years. Here's what Clark said today:

Our world is experiencing the worst financial crisis since the 1930s. The Labour-led Government is committed to doing what is needed to keep the New Zealand banking system sound, and the economy on a growth path. To that end, the government has agreed to implement a deposit guarantee scheme which will provide New Zealand depositors with additional confidence.

Later Finance Minister Michael Cullen announced the following details, including that building societies and finance companies would be eligible for the scheme and that all deposits meant all deposits except those by non-residents or other financial institutions.  See the full details below from Cullen and the Reserve Bank.

Finance Minister Michael Cullen has announced that, using his powers under the Public Finance Act, the government is to introduce an opt-in retail deposit guarantee scheme. "The scheme will cover all retail deposits of participating New Zealand-registered banks and retail deposits by locals in non-bank deposit-taking entities. This would include building societies, credit unions and deposit-taking finance companies," he said. The deposit guarantee scheme does not include related party liabilities. The new scheme is an opt-in scheme and would take the form of a bilateral contractual agreement between the Crown and the individual institutions which take up the guarantee. The scheme will be free for institutions with total retail deposits under $5 billion. A fee of ten basis points per annum will be charged on total deposits above $5 billion. This means that a bank with $20 billion in retail deposits would pay $15 million in fees per annum. The government is offering this deposit guarantee to address the current situation of international financial market turbulence and it will be for a two- year term in the first instance. This will give time to see how well international financial markets stabilise in the months ahead. "The deposit guarantee is designed to give assurance to New Zealand depositors. The New Zealand banking system remains sound. We want to ensure that ordinary New Zealanders feel that their deposits are safe in the current uncertain international financial market conditions," Dr Cullen said.

The Reserve Bank released the following details about the scheme, including that "retail deposit" meant any deposit in a bank, building society, credit union or finance company that wasn't from another bank. This suggests that corporates will also have their deposits guaranteed.

New Zealand Deposit Guarantee Scheme This document outlines the key characteristics of the deposit guarantee scheme announced by the Minister of Finance this afternoon. Draft contracts containing the full details of the guarantee will be available on the Reserve Bank's website later this evening. The Offer Under the terms of the Public Finance Act, the Crown will invite eligible institutions to enter a guarantee of their deposit liabilities. Eligible financial institutions, will be New Zealand registered banks and non bank deposit-taking financial institutions, who are fully compliant with the requirements of their trust deeds. The decision to enter a guarantee with any specific institution, whether now or in the future, will be at the sole discretion of the Crown. Which deposits will be covered? For New Zealand incorporated registered banks deposits from both residents or non-residents, will be covered. For non bank deposit takers and for the unincorporated branches of overseas entities only deposits of New Zealand citizens and New Zealand tax residents will be covered. Deposit liabilities will be covered regardless of the currency in which they are denominated. Deposits and other liabilities owed to financial institutions, whether in NZ or offshore, are explicitly excluded from this guarantee. How long will the guarantee last? The guarantee will be offered for a term of two years. Fees The government will charge a fee for any guarantee offered on amounts in excess of $5 billion. For covered liabilities in excess of $5 billion a fee of 10 basis points per anum will be charged for the guarantee. The fee will be charged on the basis of the total covered liabilities, in excess of $5 billion of the institution. What will trigger the exercise of the guarantee? The Crown will make payment in the event of the liquidation of a guaranteed financial institution, if its assets are shown to be insufficient to meet the liabilities covered by this guarantee. Administration These guarantees will be offered and administered by the Treasury. What is a deposit guarantee scheme? It is a facility where the Crown guarantees people who have deposits with institutions in the scheme. It covers all retail deposits of participating New Zealand-registered banks, and retail deposits by locals in non-bank deposit-taking entities. This would include building societies, credit unions and deposit-taking finance companies. It only covers deposits and other debt securities. What is "retail"? Deposits by anyone other than financial institutions (eg banks and non-bank deposit-takers themselves) What will it cost? The scheme will be free for institutions with total retail deposits under $5 billion. A fee of ten basis points per annum will be charged on total deposits above $5 billion. This means that a bank with $20 billion in retail deposits would pay $15 million in fees per annum. There is no direct fee for individuals, but institutions will determine if and how the costs of the scheme are passed on What is the cost to the Crown? This obviously depends on the degree (if any) to which it is drawn on (like any insurance scheme). Any guarantees will be recorded as unquantified, contingent liabilities of the Crown. Why was the facility announced this afternoon? What precipitated it? The government has moved today to ensure ongoing depositer confidence in New Zealand given the international financial market turbulence. The New Zealand banking system remains sound. This move is to give further assurance to New Zealanders that their deposits are safe. It follows other measures that have been undertaken by the Reserve Bank in recent weeks to ensure the liquidity of the banking system. Why has this been done without legislation? Parliament is not sitting, and therefore legislation can't be introduced. However, the Minister has powers under the Public Finance Act to act in this way. Does this apply to non-banks / finance companies? Yes it does, inasmuch as they meet the criteria (above). Customers should check with their institution to confirm whether they are going to seek cover. It does not apply retrospectively. What about non-residents? For branches of overseas banks and non-bank deposit-takers, non-residents will not be covered. Is this scheme comparable with the facility announced in Australia today? What about other jurisdictions? From what we've seen, the schemes are different "“ but both are aimed at encouraging confidence Where can I go for more information? Individual customers should talk with their banks or non-bank institutions.

The scheme was supported by National in a display of necessary bipartisan unity.

National Leader John Key today welcomed the move to implement a deposit guarantee scheme. "As I have said on several occasions in recent days, the National Party will support measures to protect the stability of our financial markets and I specifically identified a deposit guarantee scheme as one such measure we would support. "While New Zealand's banking system continues to be sound, with international moves including that by Australia to implement a deposit guarantee system, this is an inevitable and sensible step. "My Finance Spokesman, Bill English, will be briefed by the Reserve Bank tomorrow, and we would expect the Government to set up a fully bipartisan process for thrashing out the details."

My initial view is that this was an extraordinary but necessary thing to do. Our system was sound, but things are very volatile in the Northern Hemisphere and a collapse of confidence in the global banking system is a distinct possibility. New Zealand would not have been immune from that. I called for a deposit insurance scheme in March and was the first to call again for it last Monday.  The scale of it is enormous. It is a much broader guarantee than any other made by any other government in recent weeks. Ireland guaranteed only deposits in the six biggest banks. Germany only guaranteed individual's deposits. America only increased its deposit insurance to US$250,000 from US$100,000. Britain only increased its guarantee to 50,000 pounds from US$35,000. I'm surprised that the scheme has been extended to all building societies, credit unions and deposit taking finance companies. It is dependent however on the government accepting institutions into the scheme and them not being in breach of their trust deeds. This suggests that finance companies who have already defaulted on interest payments and capital repayments will not be eligible. The big risk is that finance companies who were on their knees could become part of the scheme and survive when perhaps they should have failed. It will depend on who is accepted and who isn't? Could Hanover, Strategic, St Laurence and Dorchester Pacific be included? They have defaulted. What about those 170,000 accounts with over NZ$5.6 billion frozen? What about those who lost money? They will feel cheated by an accident of the timing of this announcement. What happens if a finance company isn't included? That would have to trigger a run for the exits. What about mortgage trusts? Will there be a run for the exits on them. Will guarantees for finance companies encourage them to lend willy nilly?  What's your view?