Crown Retail Deposit Guarantee Scheme Bill

Hon BILL ENGLISH (Minister of Finance) Link to this

I move, That the Crown Retail Deposit Guarantee Scheme Bill be now read a first time. I am sure the House will recall the circumstances of October last year, when we faced a financial crisis on a scale not seen in New Zealand since, probably, the Great Depression. Despite the fact that New Zealand’s financial system was relatively sound because it had avoided many of the risky practices that triggered the financial crisis associated with the collapse of Lehman Brothers last year, we are part of an interconnected world and were unable, therefore, to avoid the impact of a global meltdown in confidence in the financial system. One of the immediate challenges for New Zealand at the time was that the access to overseas markets that had traditionally and consistently funded our borrowing needs dried up. We were put in the position of relying on our own savings more than we had done for many years, and, as has often been remarked upon in the House, those savings are not significant.

The Australian Government decided at very short notice to guarantee retail deposits—that is, deposits made by members of the public and by banks—and it did so alongside many other countries. The global process was started by Ireland. There was a considerable risk that New Zealand’s financial institutions could lose some of their domestic deposit base to Australia. The actions taken by the Irish Government triggered a whole raft of guarantees from Governments around the globe for precisely these reasons. At the time, the New Zealand Parliament had been dissolved for the 2008 general election, and the Government of the day established the existing guarantees scheme using the powers available to the Minister of Finance under the Public Finance Act 1989. This scheme provided assurance to depositors in New Zealand financial institutions during a period of great uncertainty and at a time when New Zealanders had seen pictures on TV of bank runs in the UK.

It is good that the world’s economic and financial outlook is improving slowly and that the risks facing New Zealand’s financial system are abating. Perhaps it would be more correct to say that the sense of crisis has passed. There is still a long way to go before all the consequences of the financial meltdown work their way through. We have not returned to the benign environment that existed before the global financial meltdown. Economies are fragile and asset markets can at best be said to be stabilising, but there are some asset markets where that is still not the case. The case to continue offering a Crown guarantee is finely balanced.

The introduction of this bill recognises that non-bank deposit taking institutions are a significant feature of New Zealand’s financial system. One has only to witness the pain that has occurred for the many New Zealanders who lost deposits invested in finance companies. The country needs a non-bank finance sector that will lend to the small business that wants to buy a ditch digger. Loss of confidence in financial institutions would severely undermine the recovery that we look forward to, and we cannot afford to take that risk at this time. We need certainty for financial institutions that provide vital funding, and savers want certainty that investments are safe. However, the Government recognises that guarantees can encourage unwarranted risk-taking among financial institutions and that guaranteeing deposits carries an ongoing economic cost.

The Government has faced the issue of how to exit the scheme with the least cost to the economy and to taxpayers, who have to pay up when a financial institution covered by the guarantee goes under, and to balance this with the least disruption to the finance sector. We consider that extending the scheme from 12 October 2010 until 31 December 2011 on tighter terms is the appropriate trade-off to address the issue, while still providing adequate certainty to the financial sector and those who rely on it. Accordingly, the Government has introduced the Crown Retail Deposit Guarantee Scheme Bill under urgency to extend the Crown retail deposit guarantee scheme in order to provide certainty as soon as possible and to avoid undue disruption to the country’s financial system. I commend the bill to the House.

Hon DAVID CUNLIFFE (Labour—New Lynn) Link to this

I wish to indicate from the outset that Labour will be supporting this urgent legislation, the Crown Retail Deposit Guarantee Scheme Bill. I will provide an outline of the reasons why, and, particularly in the Committee stage of the debate, we will provide some of the second-tier arguments that surround this issue.

The Minister of Finance is absolutely right in his recounting of the history of the retail and wholesale guarantee schemes. Members of the House will recall with some trepidation the dark days of September and October 2008. I have a very clear recollection of the then Minister of Finance, the Hon Dr Michael Cullen, negotiating with the Australian Government some of the finer points of these schemes just before taking the stage to launch Labour’s election campaign. Parliament, as the current Minister of Finance has said, had been prorogued and it was necessary for the Minister of Finance to use the powers available to him under the Public Finance Act to implement the schemes. Crucially, when the Labour Government did so, in consultation with the banking and non-bank finance sectors as well as with Treasury and the Reserve Bank, the then Government made clear its expectation that for major banks to participate in the very beneficial guarantees at wholesale level, they would also be expected to participate at the retail level, and so they did.

The Minister is also right in his brief summary of the options available to any Government now in considering how to wind up or scale back this protection as conditions around the world have improved. Basically, there are three options. Firstly, a Government can go cold turkey: end the scheme as it currently stands on its current date, and leave it to the financial sector to make its own adjustment. Secondly, a Government can provide an unlimited extension while regularising the legislative structure, as this instrument does, and providing a short period under controlled circumstances of further cover. That is the approach that both National and Labour have supported. Thirdly, a Government can provide the possibility of a longstanding retail deposit guarantee, which is common practice in other jurisdictions. We understand that the Government is considering further work in that area, and we support that, but we agree with the Government that to do so in haste in these circumstances would not be good process.

Those are the substantive reasons why we believe this policy is appropriate. It follows, therefore, that the legislation that Parliament is being asked to consider today is also appropriate. This is framework legislation, as the Minister of Finance has said. It provides powers for the Minister and the Government to implement the type of policy; that has been said. It does not provide the explicit detail of that policy, and it does not provide the fine detail of the draft deed. We will be talking some more about those policies and the details thereof in the Committee stage.

The bottom line is that this bill is appropriate. Through it, the deposits of New Zealanders will be protected, and the ongoing stability of the New Zealand financial system will be assured. This bill also aligns our scheme with similar guarantees in Australia, which is sensible and should be done. We would like to see some further explicit consideration of the form of permanent deposit guarantee insurance, and we are encouraged by indications that the Government is so considering.

This bill does not outline the eligibility policy; it merely provides the Minister with the authority to determine that eligibility. We have some concerns relating to the policy that is currently being drafted, as was set out in broad terms by the Minister a few weeks ago. The criteria requires that companies have at least a BB credit-rating to be eligible. However, some companies might not be able to obtain a sufficient credit-rating, having insufficient scale to meet the requirements of the credit-rating agencies. The transaction costs of obtaining a rating could also be disproportionately high. This could cause a further shake-out in the non-bank finance sector, resulting in further finance company losses or collapses, taking from mum and dad investors while the big banks move in to mop up the customer base.

It appears from the Government’s announcement of policy that the major winners in all this will once again be the major Australian banks. Those banks are able to benefit from the wholesale guarantee scheme now without being obliged or persuaded to participate in the reformulated retail scheme. The Government’s willingness to see the major banks opt out is yet another demonstration of its willingness to placate the big end of town at the expense of ordinary mum and dad New Zealanders and small businesses. Labour made it clear when it was in office that if big banks wanted the benefits of wholesale guarantees, then they also needed to participate in the retail guarantee scheme. National is letting them opt out. Meanwhile, the big banks are winning twice. They will pay less in fees, and they will get to grow market share at the expense of smaller institutions, some of which will, no doubt, have to rely on this guarantee, or fall over.

We have received assurances from Treasury. I appreciate the Minister’s making his officials available to us. It has been a good exercise in bipartisan consultation, and we hope it is not the last. Treasury has briefed us that the fee changes that are proposed accurately reflect the risk faced by the Crown. On that basis we are prepared to accept that the charges for non-bank finance companies are probably proportionate.

Slightly more broadly, Labour is listening to New Zealanders’ concerns about the banking system. That is why Labour, together with the Greens and the Progressive party, launched the Parliamentary Banking Inquiry last week. The inquiry is the one that the Beehive was so desperate to stop. It required National MPs to vote against their own proposal in the Finance and Expenditure Committee, and then worked to shut down participation in it. I look forward to the Minister of Finance clarifying to the House whether he, his staff, or other supporters made any moves whatsoever to dissuade stakeholders from making submissions on, or from appearing at, the banking inquiry, because that is certainly the urban legend around the traps.

National showed once again that when the chips are down it will always side with the interests of the big end of town over the needs of hard-working Kiwi businesses and families. But National could not stop the inquiry. The inquiry received around 50 submissions and a dozen substantive oral presentations at hearings, including from Kiwibank and business groups like Federated Farmers, the Employers and Manufacturers Association, and the Manufacturers and Exporters Association. Whoever was attempting to suppress the inquiry failed.

The key issues that emerged were strong evidence that consumers, businesses, and farmers are, unfortunately, being overcharged interest on short-term loans. It was also reiterated that there is a possible cross-subsidy of medium and long-term mortgages, which could contribute to a new boom-bust housing cycle that would be no good for New Zealand. There are huge issues around the growing national debt, which is now 140 percent of GDP in gross terms, resulting largely from the property loans that have been expanded through the banking system.

To conclude, the banking inquiry is doing follow-up research and is due to report in late October. A high-quality report will be produced, following international peer review. Labour is listening to New Zealand’s ongoing concerns about the banking system.

Labour will be supporting this bill. We believe that it is proper to regularise the retail deposit guarantee scheme through appropriate legislation now that Parliament is in session. We agree with the broad approach the Government’s policy has foreshadowed, which is to provide a time-limited extension to the scheme, to match approximately the duration of that of our partner scheme in Australia. Further, it is appropriate to recalculate the premia that are paid by financial institutions to more closely proxy the risk faced by the taxpayer. Where we differ in substance is that the previous Government’s policy was to ensure that the major banks participate in the retail scheme, as well as at the wholesale level. It is unfortunate that the Minister has already signalled to the banking sector that that policy no longer applies. We look forward to exploring in more detail the provisions of this bill and the scheme it supports at further stages of the debate.

CRAIG FOSS (National—Tukituki) Link to this

I rise to speak on the Crown Retail Deposit Guarantee Scheme Bill. Just picking up from the previous speaker, David Cunliffe, it is probably important to note that the extension to the scheme does not come into play until October next year and continues for about 14-odd months after that. The bill makes changes to the scheme—it tightens up the pricing and some of the criteria—and in over 1 year’s time the scheme will become voluntary. That is a sign of optimism that the worst of the financial crisis and the economic upheaval of the global financial system is over. In particular, in New Zealand we have had our fair share of upheaval, problems, and tensions within the financial sector.

The bill is necessary to provide some certainty in the very uncertain environment such as we have seen over the last 2-odd years. When the Hon Bill English introduced the bill he pointed to the beginnings of the crisis and how it had impacted upon New Zealand. But the good news is that possibly—just possibly—there is some light at the end of the financial tunnel. Perhaps the world is emerging from this unprecedented time of economic and financial sector upheaval and recession, the likes of which we have not seen on this globe for the last 70 years—since the Depression.

Late in 2008 the previous Government, with the full support of National, introduced and agreed to a retail deposit guarantee scheme. The two previous speakers pointed to the wholesale guarantee scheme, but that is a totally different beast from what we are talking about here and from what this particular bill addresses. I note that the Opposition will be supporting the bill, just as National supported the initial proposal way back in October 2008. I look forward to hearing the points raised by members from other parties.

The scheme was put together in the heat of the general election campaign, but also in the shadow of a similar scheme that was announced in Australia at around the same time. Very tense and strong negotiations were going on at the time. As we all know, decisions and policy put together under stress and pressure do not necessarily have the best and desired outcomes. A key difference between the Australian scheme and the existing New Zealand scheme is that Australia’s scheme ends in late 2011, whereas currently the New Zealand scheme ends on 12 October 2010. The closeness of the Australian and New Zealand economies, the free movement of capital between our two economies, and the common stakeholders within our economies have raised many issues and placed stress on many institutions—from our largest trading banks to our smallest finance companies, credit unions, and building societies. By asset size, the majority of New Zealand banks are mainly Australian owned, but it is necessary to note that they are all incorporated here in New Zealand. They are essentially stand-alone entities under the guidance of the New Zealand Reserve Bank, although most of their shareholders are in Australia.

The bill is necessary to put the New Zealand financial system on a relatively level playing field with the one that the Australian institutions operate. As the industry has begun to repair its balance sheets, as it has begun to address some of its longer-term funding issues, and as it has begun to start to match the maturities of its asset and liabilities books, stress has come into play, and the wall of funding maturities, if you like, particularly for non-bank deposit takers within New Zealand as at October next year, has raised a lot of issues and a lot of tension. The bill goes some way to addressing those issues, but it is more reflective and considered regarding the extension, because of its voluntary nature. That is of benefit not only to the Crown and the taxpayer but to the institutions themselves, remembering that in the normal market prior to the financial crisis there was no deposit guarantee scheme or wholesale guarantee scheme. In a normal market these institutions will hedge, and insure their own risk, but with systemic events like we have had recently we need the Crown to intervene for a short period in order to address such issues.

The scheme is voluntary. If the economy—or at least the financial system—and the ability of New Zealand institutions to raise funds come post-October next year are a lot better than they have been and are now, as far as the taxpayer is concerned it would be good if those institutions felt they did not need a retail deposit guarantee scheme, because the market itself would show the confidence in those institutions to not require such a scheme.

I will pick up on a point made by the previous speaker. It is the retail deposits that are insured under the current scheme and the extended, although tighter, scheme proposed; it is not the institutions themselves that are insured, nor their shareholders. There seems to be a bit of miscomprehension about that. New Zealand deposits that are placed with financial institutions within New Zealand are insured under the current scheme, and if the institutions themselves take up this extension under the new scheme, that is what will be insured. We are looking after the deposits of New Zealanders and New Zealand institutions, not the shareholders of those institutions.

I will raise a quick point. Yes, underlying this, there will be a better reflection on the price of any credit-type insurance of deposit guarantees, and better risk management for both the depositors and, of course, the New Zealand taxpayer. A glance at the recent Budget and papers around it shows that about $120 billion worth of potential deposits are guaranteed under the current set of accounts. So, for the sake of the taxpayer and for the sake of the institutions, if we are able to reduce that down to some kind of normality, it will be all the better for all concerned. Thank you, Mr Assistant Speaker.

Hon CLAYTON COSGROVE (Labour—Waimakariri) Link to this

As my colleague David Cunliffe said, Labour will be supporting the Crown Retail Deposit Guarantee Scheme Bill, but I will make a couple of points. The previous speaker said that deposits were being guaranteed, and that is correct. But he made an assertion that companies would not benefit—that their share price or shareholders would not benefit from such a guarantee. Well, I take issue with that. Of course they will. A Government guarantee around deposits generates far more stability in the nature and commercial stability of that company because, by its very nature, there is a Government guarantee on those deposits. Therefore it is more likely to attract shareholder support because of that stability. If there was no Government guarantee, then it is open slather across the market.

But I note a couple points. The bill does not outline the eligibility policy; it merely provides for the Minister to have the authority to determine that eligibility. We have some difficulty and concerns around that, in that the criteria relating to this policy, as it is currently being drafted, requires companies to have at least a BB credit-rating to be eligible. The difficulty, however, is that some companies may not be able to obtain a sufficient credit-rating, as they have insufficient scale to meet the requirements of the credit-rating agencies. Ultimately that may cause a shake-out in the non-banking sector, resulting in potential further finance company collapses or losses, and no one would wish that on Kiwi consumers, of course. No one is willing it to happen; I think there is goodwill across both sides of the House. But the point should be made that it could result in further finance company collapses and losses for mum and dad investors, while the big banks move to mop up customers. If we are not careful here, we will see that the major winners of the Government’s criteria as authorised by the Minister are the Aussie banks, which are able to benefit from the wholesale guarantee without being eligible to contribute to the retail scheme.

I think the Government’s willingness to see major banks opt out is yet another demonstration of the Government’s willingness, in my view, to placate big business at the expense of the smaller end of town, which is the mum and dad Kiwi investor. We have just had an unofficial banking inquiry that I and other colleagues from the Green Party, the Progressive party, and the Labour Party sat on, but in which National refused to participate, in a non-parliamentary sense. National refused, in an official parliamentary sense, to acquiesce to a request for an official parliamentary select committee inquiry into banks. Given there is a feeling, perceived or otherwise, by New Zealanders that they are being hurt by higher interest rates, one wonders why, when the official cash rate drops, the drops in interest rates are not being passed on to mum and dad mortgage holders at the same rate as the official cash rate drop.

I would have thought, politics aside, that was worth an official parliamentary select committee inquiry. Well, National begged to differ, and it said no. Then, when other parties said “Let’s do it anyway, and give institutions, mum and dad Kiwis, and those in the financial sector a chance to have their say.”, National refused to participate in that process, for its own reasons, none of which we on this side of the House can fathom. I wager that no one in New Zealand can fathom the reason either. Perhaps only the big end of town may have an answer to why National did not proceed with an inquiry. Maybe it was the fact that National is concerned only with the big end of town. National uses the rhetoric, saying that it is concerned about financial collapse, that it is concerned about the stress being put on households through added expenses during a recession, and indeed manifest through higher mortgage payments and higher interest payments. National says many correct things, but the question is whether it follows those statements with actions.

Although I support the guaranteeing of deposits, I say that words are words and again I cannot for the life of me understand why National would not support a basic select committee inquiry, which I think had the goodwill—and still has the goodwill—of almost all sides of the House, apart from National, to inquire.

Dr RUSSEL NORMAN (Co-Leader—Green) Link to this

I stand to speak on behalf of the Green Party. The Green Party will be supporting the Crown Retail Deposit Guarantee Scheme Bill. We think that it is a very sensible thing to have a time-limited extension of the retail deposit guarantee scheme; in fact, it is essential. It is essential to maintain confidence in the banking sector. Over time, I hope we can see the end of this scheme, and I am sure that we will.

The framework for this whole bill and the current situation we find ourselves in is the international financial crisis, which put the New Zealand banking sector, along with the entire global banking sector, in the position where the taxpayer had to come to the rescue of the banks. All around the world taxpayers had to come to the rescue of the banking and financial sector for the simple reason that the banks and the financial sector were too big to fail. It was simply impossible for us to contemplate having a major failure in the New Zealand banking sector, because the impact of that on the New Zealand economy would have been very, very significant and very negative.

We had little choice, I believe, but to introduce the retail deposit guarantee scheme when it was introduced in the lead-up to the election and, over time, to slowly wean ourselves off it. This legislation is a step in that direction and I think it is good. However, I think we need to look a little more broadly. Although this is a fine thing to do, it is really a band-aid to deal with a larger problem.

One of the interesting things that came out of the banking inquiry was that we need to have a broader discussion and debate about the banking sector in New Zealand and about monetary policy. For me, one of the key things that came out of the discussion was that it is all very well to have bills like this in order to maintain the stability of the banking system, but the overall stability of the banking system in New Zealand and the New Zealand economy has much larger problems than something that a short-term retail deposit guarantee scheme can fix up. That really cuts to the chase about monetary policy and the impact of monetary policy on the New Zealand economy.

We have relied on the official cash rate as our tool for monetary policy for many years now—for a couple of decades—and I think that now, in the midst of a global economic crisis, surely is the time when we have the space to rethink whether relying on the official cash rate as our only mechanism for monetary policy is sufficient.

To look at that matter we have to look at the problems that we have got ourselves into with the official cash rate. One of the key issues that has developed is that as the official cash rate has gone up, we have attracted large amounts of capital into New Zealand. Foreign capital has flooded into New Zealand via the banking sector and has then been passed on to the housing market. It has been drawn into New Zealand because our relative interest rates have been much higher than in other places. It made a lot of sense for overseas investors to send their billions of dollars to New Zealand, because it was a safe place where they could get a good rate of return. However, the impact on New Zealand was that the banks simply passed that money on to what they thought was the safest way to get a good return on their money, which was the housing sector.

The housing asset bubble has been one of the key problems for the New Zealand economy, and in the long run it is one of the key challenges for the New Zealand banking system, as well. The asset inflation in the housing market presents a long-term structural problem to the New Zealand economy, in a number of ways.

The fact that all this hot money was coming into New Zealand means that we have an overvalued exchange rate. The overvalued exchange rate has meant that the New Zealand tradable sector has been in recession now for 5 years. It is one of the key contributing factors. The overvalued exchange rate driven by the high official cash rate and high relative interest rates has meant that the tradable sector in New Zealand has suffered. New Zealand manufacturers try to compete with imports and New Zealand exporters try to send and compete overseas. That has been one of the key impacts, and, as a small trading nation, New Zealand cannot afford to have a long-term recession in our tradable sector.

The second part of it is that as the money has come in, our level of overseas debt has now got to a very high level. Our net international investment position is now minus 100 percent of GDP. We are second only to Iceland in the OECD in terms of our net international investment position. That is not sustainable. We are adding billions and billions of dollars in overseas debt, year after year, and in the long run that will undermine the New Zealand banking sector if we do not address our overseas indebtedness. The interest payments alone on our debt are greater now than our trade surplus. We had a very small trade surplus in the last quarter, but largely we have had a trade deficit. We are borrowing money to pay the interest payments on our overseas debt.

Another part of it is that as the housing sector received more and more money through the banks, which was borrowed from overseas and drawn in by the high official cash rate, we had inflation driven by the housing sector. People felt wealthier and they spent more money, because the value of their housing kept going up and up. We had inflation. The official cash rate was meant to be dealing with inflation, but, in fact, it was encouraging inflation, until it reached such a high point that it crushed the whole economy.

High interest rates had a detrimental effect on the productive sector of the economy. It was difficult for businesses to borrow money, because they had the high interest rates that the Reserve Bank was trying to use to crush inflation. All of these things together had a very negative impact on the New Zealand economy and, ultimately, a very negative impact on the stability of the New Zealand banking system.

We need to say that the official cash rate by itself does not work to maintain the stability of the New Zealand banking system. It does not suit the New Zealand economy in the long run to rely on this tool, so we have to look at some alternatives, and we need to put those alternatives on the table. Some of those alternatives are around trying to control the demand for investment properties—that is, a capital gains tax, excluding the family home. We have to start having a serious discussion about that.

We also have to look at ring-fencing the losses on investment properties. Whether that is done through loss attributing qualifying companies or other forms, we need to ring-fence those losses. We need to target the demand for investment properties in order to try to keep control of the housing sector. We must remember that median house prices doubled between 2002 and 2007. That rate is not sustainable. It was funded by borrowed money that we now have to pay back as a nation. On the other side of housing, we need to make sure that we have more of a supply of housing, particularly social housing and affordable housing.

In terms of maintaining the stability of the banking system—which this bill is trying to address, but we need other mechanisms as well—we need to look at increasing reserve ratios for bank lending into the housing market. We need to target the problem directly. It is very difficult for the Reserve Bank to suppress inflation across the whole economy by trying to use official cash rates and interest rates when the key driver of that inflation is the housing market. We know that the tools are available for us to address that situation. One of the tools is that for every dollar that banks loan into the housing market, we can insist that they leave a certain percentage on deposit at the Reserve Bank. Effectively, that makes it harder for the banks to loan more and more money into the housing market.

If we want to target the source of inflation, then rather than crush the entire productive sector of the economy and make it hard for every business in the country, we should target the source of the problem, which is what is coming out of the housing sector. The housing sector has remained flat now for some time and it looks like it will continue to move sideways, but if there is any indication that we are going back to another housing asset bubble, then the Government has a responsibility to act quickly to deal with that. We know the ways to do that. We have the tools available, but we have to expand our imagination beyond the official cash rate. By itself, it is simply not enough.

We have a range of tools that we can use to address one of the key drivers of inflation in our economy—which is what is coming out of the housing sector—without destroying the entire tradable sector and without destroying the entire productive sector of the New Zealand economy. We need to make it easy to be a manufacturer in New Zealand. If we are serious about stabilising our economy, which is out of control, then we have to make it easy to be a manufacturer in our country. We have out-of-control levels of debt, which is a major problem, and eventually that will impact on the banking sector. We can only stabilise the economy if we have the courage to face up to one of the key problems in the New Zealand economy right now and a key problem over a number of years—that is, the funnelling of billions and billions of dollars of borrowed money from overseas into the housing market.

Although I commend the Government for introducing this bill, which the Greens will support, I say the Government needs to think beyond current monetary policy. It is a pity the Government was not involved in the banking inquiry, because some of the debate actually happened there. It is the debate that our country needs to have if it is to right itself economically and if it is to have a prosperous and sustainable future.

JOHN BOSCAWEN (ACT) Link to this

It is a pleasure to stand on behalf of the ACT Party to take a call on the Crown Retail Deposit Guarantee Scheme Bill. The ACT Party, it would seem, is the only party that is prepared to stand up and represent those 87 percent of people who voted No in the last referendum. ACT is the “87 Percent Party”.

Hon TARIANA TURIA (Co-Leader—Māori Party) Link to this

Tēnā koe, Mr Assistant Speaker. Tēnā tātou katoa. This is a very good time to be introducing certainty into any discussion about the retail deposit guarantee scheme. In the space of 24 hours, three surveys have been released that provide us with confidence about the possible scenarios in which the proposed legislation will be received. The first survey is the New Zealand Roy Morgan consumer confidence rating survey. This survey shows that confidence has risen to its highest level in early September since March 2008, which was the first quarter in which New Zealand entered its recession. One of the clearest indicators of confidence arising from the Roy Morgan survey was the finding that 43 percent of the respondents said they thought that now was a great time to buy major household items. That is an increase of 6 percent from the previous survey.

The next survey was from UMR Research, which has been following public attitudes on the global crisis. It found that 61 percent of people were concerned about the impact of the crisis on New Zealand’s economy. That may still sound significant—and it is, at the very least, cautious—but it is also a big gap, compared with the figure of 72 percent of those questioned 2 months earlier. Another dramatic finding from UMR Research was that the numbers of New Zealanders who believed that the crisis had impacted adversely on standards of living had fallen from 54 percent in June to 48 percent in August, which is the lowest level of concern since October 2008.

The third in the line, but in no way the least, was a survey conducted by a parenting website of over 500 families. In that survey one-third of families had changed their dinner habits as a result of the economic downturn. The website’s online community revealed that there was considerable synergy around participants’ desire to save money in an economic downturn. So ways of old suddenly turned gold, and people began bulk buying when items were on special, and freezing supplies for future use, particularly meat. Name brands were being overlooked in preference for the plain-packaged model, fish and some premium cuts of meat were making it to the table less frequently, and bargains were filling the supermarket trolleys as shoppers planned around catalogue-advertised specials. These may not appear to be “breaking news” findings, but they demonstrate the fundamental change that many households have taken on in their attempts to introduce certainty.

In this context, then, the Māori Party is pleased to welcome the Crown Retail Deposit Guarantee Scheme Bill, which at its very essence is about creating certainty and stability in the banking and finance sector. Many New Zealanders will breathe a collective sigh of relief in learning about this deposit guarantee scheme, and about a bill that would probably better be described as the “about time” bill. New Zealand individuals, businesses, and investors will be saying that it is about time they can benefit from a form of insurance that basically ensures continuing depositor confidence in New Zealand, given international financial market turbulence.

We are all aware that markets are hungry for certainty, given the circumstances of the downturn. The concern has been about the future of the guarantee, and it is simple enough to understand why: a scheme that guarantees approximately $128 billion of deposits and approximately 3.5 million deposit accounts is a sizable investment, by anyone’s estimation. The legislation we are addressing today and will be addressing under urgency is about ensuring that the whole Parliament is accountable for the decision to extend the scheme and to better manage Crown risk.

The focus of this bill, then, is to extend the scheme by 14 months until 31 December 2011. The legislation has been described as being more or less the transition path back to normality. Normality, we assume, will be when we actually exit from this scheme to exist in a normal business environment, with all the attendant risks. A permanent guarantees scheme is not desirable, because it underprices risk and leads to increased risk-taking.

What this bill does is put in place a vital stopgap measure to help maintain confidence in New Zealand’s financial institutions. The measure bears a direct relationship to the collapse of several major banks in the United Kingdom, United States, Ireland, and other countries. As banks collapsed, Governments were called on to bail out those institutions, in an effort to create a sense of global comfort about the health of the financial system. As we all know, however, the collapse of those major banking institutions had a ripple effect in terms of setting up other concerns that other banks may also collapse. This was domino territory, given the possibility that the original banking collapse would provoke further collapses and, in turn, depositors would cease depositing or even try to withdraw their deposits en masse before their own banks collapsed. The effect was such that the volatility in one area could have sent more banks under and further destabilised the financial system. In many ways, we had little alternative but to also play our part in creating stability in our own financial institutions, and even though our banking system had been seen as stable up until that point, there was always the fear that as the rest of the world adopted retail deposit schemes to provide a type of insurance for depositors, if we did not also introduce such a scheme depositors might withdraw from our shores to invest in a country that did have a guarantee.

We welcome this extension to the retail deposit guarantee scheme. We think it balances the imperative for certainty for investors in financial institutions, while taking into account the impact for taxpayers, and we will therefore support the bill. But it would be remiss of us not to table two significant concerns. The first is that it was entirely unsatisfactory that it was not until this morning that we had actually laid our eyes on this bill. It appears unfathomable that such a significant investment in financial stability was presented to Parliament at the eleventh hour.

The second concern emerges from the fact that part of the new terms and conditions will mean that depositors will need to reapply to the scheme. Roll over is not automatic, and it is voluntary. However, details of the terms and conditions of eligibility will not be released until next week. Knowledge of the details in sufficient time to consider, let alone consult, our constituency is a principle that we take very seriously when we look at any legislation that comes before the House. It was therefore very disappointing to be prevented from taking on a full and robust process in regard to this extension of the retail deposit guarantee. Kia ora.

AMY ADAMS (National—Selwyn) Link to this

The discussion on this bill this afternoon takes us back to the period in the second half of 2008 when, amongst other things, we had the collapse of Lehman Brothers, which is now really hitting home when we see the extent of the debts involved. We are looking at over US$613 billion, which is nearly NZ$900 billion of debt by what was assumed to be one of the safest and largest financial institutions. In some ways that was the catalyst that drove the world to understand that it was facing an economic typhoon.

The sense of crisis and, indeed, panic really started to pick up momentum and Governments had to act, and act quickly, to ensure that they were not all caught up in this particular set of circumstances. At that time our own Parliament had been dissolved for the general election. We were between Parliaments. The last Government acted under the Public Finance Act, and it used the powers in that Act to ensure that retail and wholesale guarantees were put in place, to ensure that confidence could be maintained in our banking system, which the National Party certainly supported. It was the necessary thing to do and it was in line with what other countries in the world were doing.

Now it is time to look at that scheme, with its expiry looming in October of next year. I say “looming” because although that is still more than a year off, in financial terms, and looking at retail deposits, this is exactly the sort of time when people are planning long-term deposits in institutions. In fact, the period between now and then is quite a short term. So we find ourselves in a situation where it is a matter of some urgency to address the date when that deposit scheme will end—and whether it will end—and to put in place under primary legislation a properly formulated deposit scheme that can continue to ensure that we have the necessary confidence in our financial markets while we see the fragile recovery the economy is now going through continue and gain in its stability and strength.

This guarantee was always about, and continues to be about, providing security in a period of great uncertainty. It is not a long-term position, and I think there is clear consensus on that point. There is no view at all that a guarantee from the Government on retail deposits is a long-term position to be in. It is certainly pleasing to see consensus from across the House on the subject matter of the bill, but the question we have to turn our mind to is not whether it is appropriate to have this guarantee, but, rather, when the guarantee should end, and how it should be removed in a manner that does not undo all the good work that the scheme has done in ensuring consumer confidence.

We have seen, particularly in the last month, and even in the last few days, some early signs of recovery in the economy, but I think it would be a very brave economist who would be prepared to stand up now and say that the troubles are all behind us. In my own view I think that the beginnings of the recovery are certainly there, but it is a fragile thing and it could be easily derailed. There is very much a need to ensure that confidence and stability in the financial markets are maintained. This scheme is no small part of that. We are talking about $120 billion of deposits guaranteed through 73 institutions.

But more than just providing some security and peace of mind to individual depositors—mum and dad depositors and small businesses alike—the scheme has been important in a number of other important but perhaps less obvious ways. It encourages savings. We know that one of the big issues in our economy is that we do not save enough. Certainly, if there is not a sense of security in our financial institutions, we can be sure that saving will get worse. So that is an important part.

Equally, though, I think it is worth touching on the fact that the $120 billion that is guaranteed is not just sitting there waiting for someone to collect it. It is providing the funding and the liquidity that our businesses need to keep going through this recession. That directly leads to jobs and growth. So this is about more than simply providing a guarantee. It is about ensuring that the liquidity tap is not turned off and that our economy can keep functioning. That money is working hard for our economy while it is in those institutions.

The other thing it does is enable us to preserve a second tier of lending institutions, which is an important part of our financial markets. Not every borrower can access first-tier bank funds, and the second tier plays an important role. Equally, I think that anyone looking at the financial situation would agree that one of the reasons New Zealand has been able to avoid the worst of the recession that other countries have seen is that we do have a stable banking and financial sector. Steps that maintain that and encourage people to continue to have faith in our banking sector are certainly important.

As my colleague Mr Foss has already mentioned, this scheme in New Zealand mirrored what was happening in many other parts of the world, and through the Crown Retail Deposit Guarantee Scheme Bill we are now seeing the end date of our own scheme coming into line with that already in place in Australia. Of course, extending the term of the scheme does, without question, extend the period of risk. This is not something that we brush over or take lightly, but the altered terms and conditions that we will see under this new scheme, which will take effect immediately the old scheme expires, will go some way to reducing that risk. I think the point to bear in mind though is that overall the risk to our economy of not having our retail deposits guaranteed while the recovery gains momentum is a far greater risk for this country than the risk we bear through extending it.

The final point I would like to make in this first reading contribution is just to point out that the bill, if passed, will come into force immediately it receives Royal assent, thereby creating immediate certainty into the market. As I have said, the uncertainty around when the scheme will end is already causing uncertainty in terms of long-term planning decisions. Therefore, we are aiming to give immediate certainty to that market, which will allow people to start to make long-term decisions that extend beyond October of next year. Thank you.

Hon DAVID PARKER (Labour) Link to this

I endorse many of the comments made by the previous speaker. I would, though, like to explore one of the reasons why we need to eventually wean ourselves off guarantees such as these. They do create distortions within the finance markets.

There is a notable exception to the guarantees that have been offered here in the Crown Retail Deposit Guarantee Scheme Bill, and that relates to collective investment vehicles. Sometimes there are subtle distinctions only between collective investment vehicles and traditional savings institutions. For example, some of the group investment funds that have been traditionally run by trustee companies, and some of the unit trusts that have been mortgage-backed, whereby the money has been invested by ma and pa ordinary New Zealanders in a unit trust, through a unit trust or a group investment vehicle, have been invested in first mortgages over land. These are not any riskier than finance company investments. Indeed, they are less risky, because the owners of the funds who are investing them in unit trusts and group investment funds effectively have a trust interest in first mortgages over land.

So those funds are effectively investing in something that is secured by a first mortgage, yet because of the terms of this guarantee scheme—and I am not criticising it for this; I am just making an observation about the distortion it creates—and the structure of that investment, they are not eligible for the guarantee. As a consequence we have seen some pressure on those sorts of funds. There has been a run on those funds caused by withdrawals from those schemes, which are safer than most finance company investments but for the guarantee. So the presence of a Crown guarantee has made a finance company investment safer than an investment that has been backed by a first mortgage. That is the sort of distortion that can be caused by guarantees of this nature.

Unfortunately, when there is a need for these sorts of guarantees there is no way of avoiding all of the distortions at the margin, other than by increasing the scope of the scheme in a way that would involve some investments that ought not to be guaranteed. For example, if someone was investing in a share portfolio, I do not think that New Zealanders would think that the Crown should guarantee returns on that sort of investment, and that is another collective investment that one might make through a superannuation scheme, or, indeed, a unit trust or a group investment fund. So the point I am making is that guarantee schemes such as this one introduce complexity at the margin. That is impossible to avoid if we are to have a scheme, but it none the less points out that it may well be desirable to bring the scheme to an end eventually.

I also make the point that in future I think we need to be very careful about focusing only on credit ratings. Credit ratings, or high credit-ratings, are the key to the fee that is paid by an institution that is getting a guarantee. A finance company with a low credit-rating has to pay a higher fee for a guarantee. That, of course, is as it should be. For a bank with a good credit-rating, the fee that it has to pay for the guarantee is less than it would otherwise be, because the risk that the Crown is taking is less. But if we look behind that at other New Zealand - owned institutions, like some building societies and credit unions, we see that some of these organisations are quite small because we have a small economy, and that they will never have a high credit-rating. If we persist with this sort of charging mechanism, we are saying, effectively, that we prefer the interests of overseas-owned banks against the interests of smaller New Zealand - owned institutions. I suggest that that is true, because no New Zealand - owned institution can get the high credit-rating that entitles it to the lower fee structure. I think that is another distortion that this guarantee scheme throws up. I for one am very cautious about saying we should have these sorts of schemes long term, because I think they introduce distortions between participants in the finance market.

The last speaker, Amy Adams, also made reference to the fact that we need to have more than just the banking sector; we need to have sources of secondary finance. Again, I agree with that. It is absolutely imperative that an economy such as New Zealand’s is not reliant on just top-tier banks. It is good that we have a stable banking system, but the New Zealand system should be no more reliant on only 4 or 5 banks than would be wanted for any other jurisdiction overseas. New Zealand’s reliance on the big four banks is already extreme in my view, and I would not want to have a guarantee scheme that further entrenches the advantages that the banks have, at the effective market-share cost of New Zealand - owned financial institutions. Again, it is an area where we need to take care. I do support the scheme, but a member, David Bennett, from the National Government, is shaking his head, ignoring the reality that one of New Zealand’s problems is the size of the foreign-owned New Zealand banks’ repatriation of profits, and the interest that they pay on their overseas loan books to overseas jurisdictions.

DAVID BENNETT (National—Hamilton East) Link to this

The Crown Retail Deposit Guarantee Scheme Bill is a reflection of the economic circumstance that New Zealand has reached at this stage of the recession, with the country coming out of the recession and many of our trading partners starting to see a glimmer of hope. Some of the requirements and Government approaches that were endorsed by this Parliament late last year now need to be revisited and looked at in the sense of taking into account the more updated economic situation that is arising at this point.

Before we look into that a bit more, I think it is time for a few home truths to be told to the New Zealand public, through this House, rather than have what the Labour Party has been espousing by its lines of the day. When we look at what has happened in New Zealand, and we compare ourselves with some of our major trading partners, we see that the single advantage we had over those trading partners is a stable banking system. We did not see the New Zealand Parliament having to pass legislation to buy back the banks. We saw our major trading partners—apart from Australia—having to do so. What saved us, and what saved our bacon to a large extent, was the four Australian banks being solid, strong, and able to look after the New Zealand economy.

Those members on the other side of the House will never admit that, because they hate to admit that those banks have been strong and stable. They will go out there and try to put to the public of New Zealand some perception that the Aussie banks ripped off the New Zealand economy, but the reality is that we would not be coming out of this recession in the way we are if it were not for the four Aussie banks. I think that Labour members need to grow up, smell the roses, and work out that this is how the banking system works.

If we want to have, in a country at the bottom of the world, small banks owned by a Government that thinks it will deliver the financial system our trading country needs, then we are dreaming. We saw that in the late 1980s, when the New Zealand banking system was not able to withstand international pressure. But this time when we had international pressure we were able to withstand it. That is a big lesson for Labour members, which they have not learnt and will not admit to. That is a shame, because those members, in failing to admit that lesson, are denying the truth of the financial markets that exist in New Zealand.

That is not to say that we do not have a robust financial system with different tiers of debt, in which other organisations can come in and take over different levels. But certainly the vast bulk of New Zealand’s banking system is dominated by the four big Australian banks, which have provided the solidity for us to get through the recession.

This retail deposit guarantee scheme is a reflection of the financial circumstance that we now find ourselves in, where we do not need as much regulation and support as we previously had, so we are giving banks the option of having less of that requirement or back-up. This is very much the same as has been happening in Australia, as well, and reflects the change in those economies in the last 6 months, as we have seen some green light at the end of the tunnel. Thank you.

STUART NASH (Labour) Link to this

That was a very interesting speech, I say to Mr Bennett. I am not too sure what it was about or what it tried to prove—it did not say much at all. Anyway, I rise to support the Crown Retail Deposit Guarantee Scheme Bill. Let me give a little bit of background. On 12 October 2008 the then Minister of Finance, Dr Michael Cullen, announced that, using powers under the Public Finance Act, the Government was to introduce an opt-in retail deposit guarantee scheme. This was on the heels of a very similar scheme announced by the Australian Government—a Labor Government—I believe, the previous day.

At the time, Dr Cullen announced that the scheme would cover all retail deposits in participating New Zealand - registered banks and retail deposits by locals in non-bank deposit taking entities. These included building societies, credit unions, and deposit-taking finance companies. The deposit guarantee scheme did not include related party liabilities, and the initial scheme was free for institutions with total retail deposits of under $5 billion. A fee of 10 basis points per annum was levied on total deposits above $5 billion. That meant that a bank with about $20 billion in retail deposits would pay approximately $15 million in fees per annum. Quite simply, the deposit guarantee was designed to give assurance to New Zealand depositors that the New Zealand banking system remained sound. I quote Dr Cullen: “We want to ensure that ordinary New Zealanders feel that their deposits are safe in the current uncertain international financial market conditions.”

That scheme came into effect on 13 October through the delegation of authority by the Minister of Finance, Dr Cullen, to the Secretary to the Treasury under section 65ZD of the Public Finance Act 1989—another piece of Labour legislation, of course. As mentioned, the original retail deposit guarantee scheme was implemented under the Public Finance Act, so this legislation before the House is now appropriate in order to continue that certainty and to ensure the ongoing stability of the New Zealand banking system.

The reason why the original scheme did not have its own legislation is simply that the House was not sitting at the time. However, as alluded to, the Minister of Finance has powers under the Public Finance Act to enact such a scheme as long as “it appears to the Minister to be necessary or expedient in the public interest to do so.” Given the overwhelming international move to provide a similar scheme, this test would appear to have been met.

This bill will protect over $120 billion in deposits currently held by the banking and non-banking sector. Why is this important? There are a couple of very important reasons. The first is that there is another cost over and above the figure of between $625 million—at the most optimistic—to $1 billion, which is between about 40 percent and 70 percent of total exposure of losses incurred by hard-working New Zealanders since the first of about 30 finance companies collapsed, decimating the savings, the lives, and the well-being of many ordinary Kiwis.

One of the main reasons why I support this bill is that—as far as we know—so far, two investors who lost their savings in finance company collapses have taken their own lives, and many are on suicide watch. An Auckland man in his late 60s who lost more than $100,000 invested in Bridgecorp Finance killed himself after going into a deep depression. Suzanne Edmonds, who runs a group representing thousands of Blue Chip and Bridgecorp investors, said she knew of at least one other person in his 70s who had taken his own life and of many others who had become sick.

If we remember, Bridgecorp collapsed in July 2007 owing $459 million to over 14,000 secured debenture holders—14,000 ordinary Kiwi mothers, fathers, sisters, brothers, husbands, and wives who had worked and saved for their retirement or for their children’s or grandchildren’s education. The vast majority were savers and not investors, only to have the impossible happen. The plague that visited and wiped the savings of earlier generations in the form of the Great Depression was now visiting their homes, and it made us all sick to the stomach as we watched and read about the horror stories—some of us were much sicker than others, though.

Then there was the story in the New Zealand Herald on 16 August about Karina Williams, who has watched her parents’ health deteriorate rapidly since they lost more than $200,000 in the Blue Chip collapse. The article states: “Williams said her father, Jack, 84, had a heart attack last Christmas when he and his wife, Ngaire, 72, received a Property Law Act notice that their house would be sold to pay off their debt. ‘It’s the stress that is taking its toll,’ Williams said. ‘The financial costs are becoming like a crippling cancer that’s affecting these people. There’s been attention drawn to the fact of the collapse of these companies but not the collapse of health inflicted because of the waiting.’ Ngaire Williams said she was staying positive. Her husband was released from hospital last Friday, 11 days after suffering an aneurysm she attributes largely to stress.”—and that stress was caused by the collapse of that finance company.

The human cost of financial collapse has been huge. At the time, New Zealanders demanded that their Government take action, which the great Dr Cullen did, as he always did. This bill simply seeks to extend Dr Cullen’s and Labour’s scheme. As far as ordinary New Zealanders are concerned, the scheme works by protecting eligible depositors against default by participating institutions up to a maximum of $500,000 per depositor per institution for bank deposits, and $250,000 per depositor per institution for non-bank deposits. It should be noted that the scheme does not protect financial institutions against commercial processes such as business growth, shrinkage, mergers, take-overs, restructures, or, most important, failures.

I am also very supportive of this scheme because it provides a high level of stability to the financial sector during fragile global economic times. As we are all aware—and as the Labour, Green, and Progressive party banking inquiry confirmed—the banks have been making an extraordinary profit on short-term floating interest rates. However, we all acknowledge that the cost of international finance has increased substantially since the beginning of the financial crisis. Let us say that this began or became a globally acknowledged issue with the bankruptcy of Lehman Brothers on 15 September 2008. Actually, did that not happen before the last election?

PESETA SAM LOTU-IIGA (National—Maungakiekie) Link to this

I wish to take a short call on the Crown Retail Deposit Guarantee Scheme Bill. A number of speakers before me have touched on the advantages of the bill around giving certainty to financial institutions and maintaining confidence in our financial system.

I will raise a couple of points that have been put forward by members opposite, particularly around the financial inquiry they held in the last month. While they have been grandstanding by setting up bogus inquiries, members of this Government have been travelling the country and talking to financial institutions; we have been actually visiting the financial institutions that are the heartbeat of our economy. We have been talking to and listening to those financial companies, and one of the biggest things on their agenda has been the extension of this deposit guarantee scheme. So we have acted. I commend the Minister of Finance for taking this bill through Parliament early in order to give our financial companies a level of certainty in terms of the extension of the deposit guarantee scheme.

The scheme is about minimising the exposure of the taxpayer. Although members opposite would like to see some sort of socialised banking whereby everyone pays a fee, the way it works in reality is that there is a risk-return trade-off. Mr Parker referred to the big end of town benefiting from this bill, but it will actually benefit a number of financial institutions, such as South Canterbury Finance, which has a rating of BB+ and lends to a number of rural and urban customers. It will benefit them by allowing our businesses to expand and grow, particularly in the export sector, and by providing employment opportunities, which this country desperately needs. So this measure is not about supporting just the big end of town but middle-tier finance companies that are highly reliant at the moment on this deposit guarantee scheme.

The bill is about protecting financial institutions, but not to the extent that those financial institutions are buffered from the commercial realities of business restructurings and business failures. It is about supporting the finance sector through this difficult time, and it is about the rough edges of the economy. We have seen a recent Treasury report that talked about a turn-round in this economy, but that turn-round has not yet eventuated. We are yet to see economic growth quarter on quarter, but we look forward optimistically to it.

I support this bill. It is a good bill. I think it addresses the uncertainty in the finance sector at the right time. Thank you.