Crown Retail Deposit Guarantee Scheme Bill

CRAIG FOSS (National—Tukituki) Link to this

I rise to speak to Part 1 of the Crown Retail Deposit Guarantee Scheme Bill. This is obviously the Committee stage, and questions have been raised by one or two previous speakers about why there will be no select committee process for this bill. I will quickly touch on that first—because, as you will note, Mr Chairman, Part 1 is quite a small part.

Quite simply, this bill potentially has commercial impact on the equity, the share price, and the debt price not only of New Zealand institutions but of institutions around the world, particularly the parent institutions of some of the banks in New Zealand. I ask members to imagine the bill going through our normal select committee process, with submitters arguing about what the various ratings and costings should be. I can understand why someone would like that process, but this bill is quite particular, and we do note that when the guarantee scheme was first initiated, according to the underlying rules and regulations here, it did not go through any select committee process. It was brought in under urgent circumstances by the previous administration, as speakers have noted during the first and second readings.

So it seems somewhat unusual that something that is more of a voluntary extension supposedly needs to go through a select committee process. The imperative is that the markets are closed, at least in New Zealand, but members may notice that some debt prices moved around quite substantially when the media discussed whether the deposit guarantee scheme would be extended.

Another point is that a previous speaker thought that the current scheme ends in about 4 weeks’ time. In fact, it ends on 12 October 2010, so it ends in 4 weeks and 1 year. That might seem a minor matter, but it is essential to what is being implemented here. Again, this is an extension of about 14 months in about 13 months’ time.

Again, I know we are in Committee, but I note that the scheme was brought in to ensure liquidity in the market. Liquidity was needed to keep money moving around, to keep loans, and to keep the velocity of money in the economy happening, because, as we recall, it was frozen at the time, and there was no liquidity out there whatsoever. That was the imperative reason why the scheme was brought in, and, interestingly, this now addresses the difference between the Australian scheme of about 3 years at the time and the New Zealand scheme of 2 years. But it recognises that things have changed, and that the risks to the taxpayer and the institutions themselves, hopefully, will have played out somewhat.

Again, a previous speaker seemed to miss the point that the scheme is voluntary for larger banks. So they are getting no subsidy whatsoever, and, in fact, the charges for them, released by the Minister 2 weeks or so ago, were higher than what they are currently paying under the existing deposit guarantee scheme. So they will be making a rational economic decision as to whether they are included in the extended scheme. Hopefully, at that time, as far as the taxpayer is concerned, the larger banks will not be in the scheme, because they feel no need to be. Hopefully, liquidity will be back in the system and things will be moving towards normality. If that was the case, the underlying contingent liability on the books of $120 billion would probably move down to something like $30 billion. From the taxpayer’s point of view that is not a bad deal. I note that members opposite are voting for the bill, and I am sure they have some issues to raise.

I have one final point in relation to Part 1. The mortgage-backed securities that the member was talking about were, allegedly, supposed to be matched books. So if the funding on the liability side, the term and the maturity of it, matched the asset side, it did not matter too much whether they had guarantees, because they had matched funding books. So they lent long and borrowed short, and therein lies the problem of much of the New Zealand financial system, which this bill, plus the changes to the non-bank deposit takers, which are coming in within the next year, will start to address. Thank you, Mr Chair.

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

I rise to take a call in the Committee stage of the Crown Retail Deposit Guarantee Scheme Bill. I want to focus on two particular issues: first, the level of consultation on the bill, and, second, the costs in relation to the role of the banks.

Let us begin with the costs, because that issue—the participation or not of the banks and whether that makes a difference—has been raised by several of the speakers from Labour. So far we have been discussing that in qualitative terms. We have said it would be better in principle if those banks that were benefiting from the wholesale guarantee scheme were also in the retail scheme to spread the risk and, I presume from the point of view of the fiscal system and the Crown, to ensure that there was adequate fee revenue. But we have not yet gone into the details of what that fee revenue is, so I thought it would be instructive to look at some of the numbers.

Fees to date on the retail guarantee scheme, in the regulatory impact statement, are $87.4 million, which is slightly more modest than the $119 million per annum forecast in the original proposal. Here is the rub: of the $87.4 million, $81.9 million is fees from banks and only $5.5 million is fees from non-bank financial institutions. So if the banks are out, which this Government is prepared to allow, the revenue stream to the Crown collapses and, arguably, the Crown is left holding an elevated average level of risk in the face of a much reduced level of revenue offset.

The position is even worse if one looks at the interrelationship between the retail guarantee scheme and the wholesale guarantee scheme. These numbers are really quite significant if we go back to the original projections. For the wholesale guarantee scheme, overwhelmingly from the bank rather than the non-bank sector, the figures are $300 million in the 2008-09 financial year; $450 million—and this is just the fees to the Crown—in 2009-10; $400 million in 2010-11; and $1.15 billion between 2011-12 and 2016-17. That is a total of $2.3 billion in revenue to the Crown in fees from financial institutions for the wholesale scheme alone. It is little wonder then that the banks are perhaps keen not to participate in some of those streams at their choice, and the parent banks in Australia, we understand, are considering their options.

The point is simply that if the Government is going to allow banks to pick and choose which of the schemes they will maintain a presence in, the fee revenue to the Crown will collapse and the taxpayer will be left supporting a riskier bundle of assets. That is a significant issue and I call on the Minister of Finance to take a call to defend that and to say whether and how the remaining revenue streams will sufficiently offset the risk that the Crown is taking.

There is another issue that has been much the subject of debate in the latter part of the first reading. It is the question raised by the Hon Lianne Dalziel about lack of consultation. Yes, it is true, as I have previously stated, that the Minister has allowed officials to brief Opposition spokespeople, and we welcome that. But as my colleague has pointed out, that is a poor substitute for a proper select committee process where interested parties, the public, and members from around the Chamber get to ask formal questions on the record of officials and to deal with the matter in submissions. We do not believe that with the existing scheme going as long as October 2010 there was a necessity to rush this bill through in urgency without at least a limited select committee process. We think that is a matter of regret.

I guess there is a growing feeling in the community that one of the hallmarks of this Government is either the refusal to consult or the setting up of processes best described as sham consultation. A couple of examples might serve to illustrate the point. The first is, of course, the Auckland legislation in several tranches. The first one, which terminates the existing territorial authorities, was rammed through under urgency with no consultation and no select committee process. It terminated the existing institutions, thereby making change a veritable fait accompli. The second issue was the subject of the Māori seats for the Auckland super-city. A special committee was set up but the Government did not even refer to the results of that select committee because it had not yet reported. The decision was made in Cabinet without reference to the report, and poor old John Carter, a decent bloke, was left presiding over a select committee that was not a real process. He, the Minister responsible for the bill—

AMY ADAMS (National—Selwyn) Link to this

I rise to take a call on Part 1 of the Crown Retail Deposit Guarantee Scheme Bill, and before I start I really have to comment on the speech made by the member who has just resumed his seat, David Cunliffe. He purported to make quite some mileage out of the fact that this bill is being passed under urgency and he purports to be quite concerned about this. That concern does not extend, obviously, to his not voting for it. To me, the fact that that member does not understand the urgency that relates to this measure, notwithstanding that we are 12 months out from the expiry date, really highlights his lack of grasp of this area. Retail deposits are not decided on the day they fall due. The retail market in deposits needs to know now what the situation will be 12 months out, and preferably 18 and 24 months out.

Anyone in the financial market understands that this matter is urgent, so we need to process this legislation quickly. Already the sector is calling out for some guidance. Already we are seeing that decisions are not being made and that investor confidence is starting to flag, because that guidance is not there. We have to process this bill as a matter of urgency, and if that member had a better grasp of financial reality and the reality of financial retail deposits, he would understand that. Clearly, he does not; none the less, his purported concern does not extend to not supporting the bill. Furthermore, I would have thought that the fact that there is unanimous support for this bill across the Chamber would tend to suggest that it is quite appropriate for it to be processed in this way. I would have thought that those members would be supporting the process, but if they want to score points, that is fine.

The bill is focused on ensuring depositor confidence. As I said in my first reading contribution, it is this country’s stable financial system and stable banking system that has enabled us to avoid the worst part of the global recession, which the rest of the world is experiencing. We are lucky in this country that we have a relatively stable financial sector—

Hon LIANNE DALZIEL (Labour—Christchurch East) Link to this

I want to return to the issue of consultation, which I raised in the second reading debate on the Crown Retail Deposit Guarantee Scheme Bill. I have in front of me the 25-page regulatory impact statement, which I downloaded from Treasury’s website during the dinner break and which, of course, was not included in detail in the bill, largely because it would dominate the bill, as the bill is so small. The executive summary of the regulatory impact statement is all that appears in the bill itself. I think it is important that we have a discussion about what we were actually seeking, which was something that Treasury itself recommended in the regulatory impact statement. We have just heard from the member Amy Adams that somehow we are asking for a full 6 months at a select committee, which we are not. We are simply asking for what Treasury recommended as an appropriate process, given that there has not been adequate consultation.

Let me read paragraph 65 of the regulatory impact statement: “The proposals for policy changes to the retail DGS were developed by The Treasury and the Reserve Bank of New Zealand in consultation with the Ministry of Economic Development (including the Companies Office), and the Securities Commission. These views have been reflected in the policy development. Annex 3 provides further detail on the issues raised in consultation and how these were dealt with.” These agencies developed the legislation that we have before us today. I actually believe that parliamentarians have a right to hear from those officials, to be fully briefed on all the detail, and to have an opportunity to debate some of the decisions that have been made. I am not 100 percent sure about them, and I think that when we go through the detail of this bill and get some feedback from the Minister of Finance, we will find that some issues need to be talked through a little bit more than this bill and this process allow.

The regulatory impact statement goes on to state: “The decision was made not to consult proactively on the proposals with the public. This is due to: officials already having a reasonable amount of information about stakeholder views from regular interactions (summarised in Annex 3).” I have now had an opportunity to read annex 3, which I had not had when I spoke in the second reading debate. Annex 3 creates further difficulty for me because it talks about some of the feedback that the Government has, in fact, had in respect of concerns raised by both the banks and the non-bank sector. I want to highlight a couple of these concerns, and I think it is important that the Minister responds to them.

The first is the questions around distortions that were being created by the deposit guarantee scheme. My colleague the Hon David Parker raised those concerns in his second reading contribution. The regulatory impact statement states that “many non-banks are finding it difficult to attract deposits after the end of the guarantee period (creating a ‘wall’ of maturity). A business grouping has expressed concerns about the distortions to financial markets created by the DGS.” When the Government responds to this, Treasury says: “The extended DGS is designed to minimise economic distortions by having much more risk sensitive pricing. It is designed with a definite end date,”—it has gone from 2010 to 2011, so not much has changed except for the actual date; the definite end date was already there—“to help reduce the risk of another wall of maturities forming before the end of the guarantee period.” This means that there will be no lending after 2011 from the mezzanine finance sector. That alarms me, because essentially the Government is admitting that this bill will simply delay the problem.

I am not opposed to the idea of extending the deposit guarantee on the basis that it matches with that of Australia. I was also interested to see that the banks do not actually regard themselves as at any risk now from flight to Australia, which is very interesting, because that certainly was not the view at the time that the original scheme was put into place. There was a real concern that if we did not put a scheme into place—with, unfortunately, the lack of sophistication in our investing market—people would be persuaded to put their deposits over the Tasman in order to ensure that they were covered by a deposit guarantee. This is certainly a particular concern.

STUART NASH (Labour) Link to this

I stand to support the Crown Retail Deposit Guarantee Scheme Bill. There were two reasons for the scheme being undertaken by the Labour Government in October 2008. The one that most people have talked about was the desire to maintain liquidity at a time of immense tightness in global cash flows. I am aware that the BNZ was very close to implementing its contingency strategy on how to operate without access to foreign funds. We saw what happened when there was a rush on the funds of finance companies—they collapsed. As my colleagues have spoken about, the first charge of the Labour Government was to provide a Government guarantee to depositors to ensure that there would not be a run on the funds of banks.

As the Hon David Parker said, had there been a rush on the funds of banks similar to the rush on the funds of finance companies, the New Zealand economy would have been in grave danger of experiencing the sort of collapse we had seen overseas, in Europe and in the United States, or perhaps of being in even worse shape than that. Of course, the mess in the UK ended up costing the British Government significant amounts of money, and it was forced for all intents and purposes to nationalise large chunks of the banking sector. The whole argument about banks being too big to fail was belied by the fact that the UK Government nationalised much of the banking sector, at a huge cost. And let us not talk about the situation facing US investors.

We on this side of the House understand the importance of a strong banking sector. It annoys me a little bit when I hear members of the National Government standing over there preach at us as if we do not know anything about finance, we do not know anything about the economy, and we do not know anything about the banking sector. After all, the Labour Government is the only Government in two generations to lower the corporate tax rate. I would say that the small to medium business sector would say the Labour Government was the friend of small to medium businesses.

JO GOODHEW (Junior Whip—National) Link to this

I move, That the question be now put.

Hon DAVID PARKER (Labour) Link to this

I note that the Minister in the chair, the Hon Bill English, has yet to respond to any of the questions that have been raised by the Opposition in respect of a bill that is not going to a select committee, and that the Government sees as a very important bill, yet we already have closure motions being put forward by National members. I suggest, Mr Chairperson, that you should not listen to those closure motions for a while yet.

I have a question to ask the Minister in the chair about how he plans to get New Zealand out of these guarantees. Although the regulatory impact statement makes the point that this is necessary and that it seeks to minimise distortions in credit markets, there is no doubt that it is distortionary and there is no doubt that it inhibits the operation of the market. There is no doubt that it advantages some institutions relative to others, and there is no doubt that it creates a distortion in that finance companies that are higher risk than banks are none the less guaranteed. Although the payment that they have to make for the guarantee facility might, to some extent, vary to take account of that, I suspect that we have seen a flattening of rates in New Zealand as a consequence of the ability of some finance companies to avail themselves of the Crown guarantee. I think it is important that we see a way forward when there is a plan for either a permanent guarantee scheme, which would be very difficult in my view, or we have to transition away from any guarantee scheme.

I say to the Minister that we currently have a scheme that applies only to debt securities. Debt securities have a legislative jurisdiction that is, to a certain extent, like all definitions, a little bit arbitrary. The arbitrariness can be illustrated from the difference between something that is nominally a debt security and something that is nominally a collective investment. As I have mentioned previously, investors in mortgage-based contributory mortgages or mortgage-based group investment funds or unit trusts cannot avail themselves of this guarantee scheme. That has led, effectively, to a rush on what are very secure forms of lending. They are mortgage-backed securities and they are far less risky than finance company investments, on the whole. Yet because of the way in which there has to be a boundary around a guarantee scheme such as this one, which is found in Part 1 in the definition and is limited to debt securities, it does not refer to participatory securities and collective investment schemes. Effectively, through this definition we are limiting the guarantee to finance companies, banks, and building societies, but investments of money that are giving people a trust interest in a first mortgage are not covered by the guarantee scheme. As a consequence, that important part of the market—less important in New Zealand than it is in Australia, but none the less an important part even in New Zealand—is shrinking. Who is that to the relative advantage of? It is to the relative advantage of New Zealand because of the ownership structure of our major financial institutions. It is mainly to the advantage of the banking sector. We know that our banking sector is predominantly overseas owned. Therefore, we see further concentration of profits into the non - New Zealand - owned part of the banking sector, to the disadvantage of New Zealand - owned parts of the sector. I ask the Minister to take a call to give some understanding to the Committee as to how, when we come to the end of the extended period of the scheme, he sees New Zealand transitioning away from the scheme.

I will also talk a little bit about the proposed fee structure. It is relevant to Part 1 because the fee structure arises under the guarantee scheme and the guarantee funding facility. The terms of those facilities include fees that are charged to the recipient of the guarantee. My second question for the Minister relates to the breakdown of fees. I acknowledge that the Minister has a very difficult task and that he wants to see that the guarantee properly takes into account the relative risk of different investments. It is appropriate that riskier investments pay a higher fee for the guarantee, because it is more likely that the guarantee will be called upon. For that reason I can see why finance companies should have a higher fee charged than a stable bank, but unfortunately the metric that is chosen for the investment of fees is Standard and Poor’s - type ratings. The higher ratings are available only to very large institutions. We know that the only very large institutions in New Zealand are overseas banks. All of the smaller institutions that cannot get that high AA rating by virtue of their size, including some very secure building societies, smaller institutions like some of our smaller building societies, and some of our better finance companies, will never get a very high rating. As a consequence they will always be paying a higher guarantee fee.

I ask the Minister to justify how that situation is in New Zealand’s interest. Although we have to have regard to relative risk, Standard and Poor’s ratings—which internationally have been found wanting in the last year or two, at least in some of the markets that have been rated by the agencies—are a too simplistic way to look at it. We do not want to have a system that further entrenches the existing advantages of the major banks, to the detriment of the New Zealand economy, because we know that for those major banks all of their profits are repatriated overseas, except to the extent that they reinvest in expansion in their New Zealand business. There are a lot of profits, which are a large contributor to our current account deficit and we do not want to see that contribution to our current account deficit grow. It concerns me that the way in which this fee structure is proposed will further entrench the advantages of banks and disadvantage the smaller New Zealand institutions, including our smaller banks like SBS and also the Taranaki savings bank. I would like to think that the fee structure could reflect on the fact that although under Standard and Poor’s rating terms those entities are not seen to be as stable, in practice I think they are no more at risk than the larger banking institutions. Indeed, those larger banking institutions may well lend to higher multiples of equity than some of the smaller banks. I hope the Minister takes a call to respond to those two points.

CRAIG FOSS (National—Tukituki) Link to this

I move, That the question be now put.

Hon LIANNE DALZIEL (Labour—Christchurch East) Link to this

I am disappointed that the Minister of Finance has not responded to the questions we have put to him. I think it is important that he responds. The question that I really have been looking for an answer to is why we cannot have a limited select committee process for the Crown Retail Deposit Guarantee Scheme Bill. That was recommended by Treasury in the regulatory impact statement. It is not often that Treasury recommends something and the Government simply turns a blind eye to it, unless there is a reason. But we have no reason; nothing has been presented to us by any of the Government members who have been asked to get up and speak on that particular matter. For them to seek closure motions after a very short debate, and to have no response at all from the Minister, is quite strange. I am surprised because I thought this Minister was capable of responding to the questions.

I will go back to the details about the consultation, which are in annex 3 of the regulatory impact statement. Banks raised their concern about the extension of the scheme, saying there was “mixed support for extending the Scheme to match the Australian scheme … Banks tend to think it is not necessary for them and risk of depositor flight to Australia is low. Finance companies”—surprise, surprise—“tend to support extension. Some Credit Unions have chosen not to opt into the DGS because they have a relatively sticky depositor base.” That is obvious. The regulatory impact statement continues: “Entities operating outside of the DGS (e.g. fund managers) are concerned about the competitive disadvantage that the Crown guarantee puts them at.” That is exactly the point that has been raised by the Hon David Parker and must be answered in this Committee tonight as the bill progresses under urgency.

I raise another issue that was also raised in the various engagements with stakeholders, as Treasury and the Reserve Bank have described them. A workers union and an economic thinktank—they are not described by name—have said that this bill is an opportunity to attach conditions on institutions’ behaviour for the extension. The two particular examples that were raised with the officials were employment protection and mortgage holiday provisions. I can understand why unions and any economic thinktank worth its salt would want employment protection at a time like this, and also that mortgage holiday provisions are absolutely vital to enable some people to survive the first redundancy their family will have experienced in a lifetime. That genuine concern has been expressed to me as a constituency MP, and I am sure constituency MPs on the other side of the Chamber will know exactly what I am talking about.

I will read the officials’ response to that suggestion. They said: “We have assessed the idea of introducing conditions on the guarantee, but consider such conditions may undermine the objectives of the guarantee, e.g. it may stop firms downsizing, when that sort of change is necessary to ensure their future viability.” That may well be in terms of the direction the Government wants to point some of the non-bank sector to, but when we are talking about the banks, I understand very well why certain unions would be pushing for a removal of the risk of outsourcing to other countries. The banking sector has seen a lot of that. If the Government is to provide this guarantee, we are talking about the taxpayers of New Zealand basically underwriting performance in this regard. It is important that we have a bit of a debate around these conditions.

The mortgage holiday provisions are another issue. As I say, that issue is not even responded to by the officials, which is a bit unfortunate because we are trying to protect depositors over the period of uncertainty that has been created by the global economic environment. That is exactly what the banks would be protecting by giving a mortgage repayment holiday on favourable terms. That in itself is a protection that could be offered during this period of economic uncertainty. It is unfortunate that we have not really been given an opportunity to debate these matters. That is what a short time—1 or 2 days—at a select committee would enable us to do.

STUART NASH (Labour) Link to this

I will talk about some of the clauses in the regulatory impact statement of the Crown Retail Deposit Guarantee Scheme Bill. I will also pose a couple of questions in the next 5 minutes to the Minister of Finance, in the hope that he will take a call and answer these questions. As has been mentioned, I think, this is a very important bill, and it has fiscal implications. It has wide-ranging investor and saver implications, and I think all of New Zealand would like to hear what the Minister of Finance has to say on those things.

As my colleague the Hon David Cunliffe mentioned, the amount of the fees collected under the current fee structure to date is approximately $87.4 million per annum. Imagine, I ask my colleagues, how much of that $87.4 million collected in fees for the retail guarantee scheme could have gone to the adult and community education scheme. If the Government put $13 million into adult and community education, it would not be in the bother it is in at the moment. But anyway, that is another story. One thing I will elaborate on, which the regulatory impact statement talks about—

Hon BILL ENGLISH (Minister of Finance) Link to this

There have been a couple of questions. Firstly, there has been the question of why the Crown Retail Deposit Guarantee Scheme Bill is going through the House in this form. There is a simple reason for that. It is the need for maximum certainty, particularly in respect of listed entities and any institutions that may be under financial pressure currently. A judgment was made, and I do not pretend that it is any more than a judgment, that the process we are using is the best way to ensure that certainty.

With regard to consultation, through the mechanism of the Reserve Bank consultation with non-bank deposit takers over the new regulatory structure—actually, there was a significant discussion with the sector about this particular issue over time—it became quite apparent that with only a bit more than a year to go until the end of the existing guarantee, it was quite important for the Government to move with some speed to create certainty. Members might see in the regulatory impact statement a graph that shows the build-up of deposits against the end date of the guarantee. That was clearly going to become a pressure of instability in the sector.

On balance, the Government made the judgment that it should get on with making a decision about the extension of the guarantee, and to execute that extension as quickly as is reasonable. The Government appreciates the support of Parliament in doing that.

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

I will take the opportunity to respond to a couple of things the Minister said, and then to do a wrap on some of the macro and debt issues that are covered in Part 1 under the term “debt security”. In respect of the first matter, the Minister said in response to the Opposition that the reason we are in urgency and dispensing with any select committee process is to maximise certainty. There are two aspects of certainty. The first is in respect of timing, and the other is certainty in respect of detail. It is certainly not as adequate for Parliament to debate this under urgency with no recourse to a select committee, with no opportunity to hear the concerns of ordinary members of the public. They are the depositors, as Mr Nash said, who have, in many cases, lost their life-savings through failures in the non-bank finance sector. The questions that may be raised by the institutions themselves in public session, which may or may not be the same as they have raised in private with the Reserve Bank, deserve a fair hearing. As I said in my earlier intervention, this Government is getting a bit of a name for sham consultation processes, and it is a shame that this should be added to the list.

The Minister of Finance mentioned consultation by the Reserve Bank. The issue with that is that the public cannot see it. The public is not exposed to the arguments for and against. The process is opaque. It is behind closed doors. The public is not even fully aware of what tools the Reserve Bank has at its disposal, or the adequacy of those tools. But, having said that, the Opposition supports this bill, because on balance, notwithstanding those weaknesses, it is important that we extend the scheme under controlled circumstances to match or approximately match the Australian scheme. Otherwise, there could be a flow of funds potentially from institutions here to institutions across the Tasman that are covered by a deposit guarantee when ours are not.

One aspect that has been debated in the Committee stage is the voluntary nature of the scheme, and in particular the de-linking of the retail from the wholesale guarantee scheme. So it is instructive on page 10 of the regulatory impact statement to see these beautifully crafted words of bureaucratise: “The economic and stability pros and cons of delinking the retail and wholesale scheme are finely balanced, including a possible variant of making it compulsory for some groups only, (e.g. banks).” Well, is that not what the Opposition has been saying? If those banks, the self-touted pillars of security that the member opposite Amy Adams was keen to propound, are providing 90 percent - plus of the breadth of assets that spreads risk, and 90 percent - plus, because of their size, of the revenue streams to the Crown, is the Crown not, paradoxically, exposing itself to a higher average level of risk if it allows them to opt out?

In the end, it brings us to the bottom line. This first part is about debt security. The debt we are talking about is private debt. It is overwhelmingly bank debt—90 percent - plus bank debt. How much? New Zealand’s GDP is around $140 billion to $150 billion. New Zealand’s gross debt is 140 percent of our gross domestic product. That is 140 percent, in gross terms, of our gross domestic product, and it is rising at 10 percent per annum—that is 150 percent of gross domestic product in current trends; a year from now 160 percent, if one rolls out 2 years. At what level does that become an unsustainable level of national debt? Compare that with the Crown’s balance sheet. The Government was, perhaps rightly, concerned to ensure that it did not get out of hand. We would, too, if we were on the Treasury benches. But it is not the main game in town, nor is it the only responsibility of the Government of the day. The Government has its handle on the country’s most potent economic levers. The public elects a Government to manage the country’s book, not just the Government’s book. Therein lay the weakness of this year’s Budget. It had much to say about the Government’s debt, but nothing at all to say about the country’s debt, which dwarfs it at 140 percent of GDP. Yes, let us shrink it, I say to the member opposite, Craig Foss. It is 140 percent of GDP—and the Government’s debt is how much? In net terms it was zero. It was single-digit percents, post-crash.

AARON GILMORE (National) Link to this

I move, That the question be now put.

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

Part 2 of the Crown Retail Deposit Guarantee Scheme Bill provides for the powers that allow the Minister to specify types of entities and criteria. It will allow the Minister of Finance to give a guarantee according to those criteria. It requires the Crown to assume creditors’ rights and sets out the responsibilities of payment in respect of guarantees. This is the meat in terms of the operations of the bill, and in that regard it is appropriate for us to turn to the relevant assessment in the regulatory impact statement of the extension options.

Three broad options were considered. One was a continuation of the status quo, which we have described as the cold turkey option. It is the option that the scheme will terminate in October 2010. As one member opposite rightly pointed out, the reason for having an early decision—although we believe the process should not have been as truncated as this—is to allow institutions to manage their books. The data is that about one-third to 40 percent of the debt is for a period shorter than 1 year in duration. About another third is for a period of between 1 year and 2 years, and that third is now within the window of the closure of the current scheme. So it is appropriate that we are considering now the future of the scheme.

The arguments in favour of allowing the scheme to go cold turkey at that point were that we would remove so-called distortions from the market, whereby the risk to investors is masked because of the guarantee scheme—that the lame were covered as much as the only partly lame. The argument was put up that by having banks and non-bank institutions with different credit-ratings put together—albeit at slightly different interest rates—the risk and the return were blended, and that that was opaque to the market. So that was the first argument. The second argument for going cold turkey was that it was the fastest way to reduce the exposure to risk of the Crown.

If the Government is to be believed when it says the recession is over, then it would seem sensible for it, following its own philosophy, to allow the banking sector to adjust to the new post-recession era by removing these guarantees altogether. However, it has decided not to do that. The reasons for extending the scheme by one year are, firstly, to roughly match the timing of the extension to the duration of the Australian scheme, thereby preventing a flow of funds from New Zealand institutions to those across the Ditch, and, secondly, to ease the sector into a post-guarantee era and to more gently match the withdrawal of protection to what the sector may consider to be a slow and, perhaps, fragile recovery.

We believe that the Government has been trying to have it both ways on the rhetoric of this recession. At the same time that the Minister of Finance has been saying the Government should never waste a good recession, and that it should prepare for privatisation and for other radical measures, like raising GST as soon as he can get the working-group to report on that—let us not waste a good crisis—he has also been telling us that gardens are growing, the green shoots are up, the sun is out, spring is here, and the worst has passed. Treasury has said it will be all hunky-dory, with only 7.5 percent of people unemployed. That is only double what the figure was before the election! That is only 2 people losing their job, their identity, their family’s livelihood, where it was one before the election—so there are serious, serious consequences.

That was the argument for a slower return to a post-guarantee world, and, on balance, that is what the Government has gone with. We believe that it was the right decision. We believe that it is right to match our scheme with the Australian scheme, and we think it is right to give the sector some time to adjust. We also think it is fair enough to have reasonably tight criteria, so that we do not mask undue risk. Although we acknowledge that it is harder for small companies to get credit ratings, we believe that there has to be some relatively objective measure of creditworthiness. That is kind of enough of a shared zone for us to vote for the bill.

But we do have major reservations, which show up in this part again, about the role of the banks. It is our considered view that it would be more secure for the Crown, in terms of the spread of risk and of less exposure to the Crown in terms of fiscal revenue streams, if the banking sector were expected to be included in both the retail and the wholesale schemes. In taking both together, the risk, while being partly masked, is bundled in a way that we believe adds more security to the system as a whole and protects the Crown from a revenue loss, because the income stream is greater. As we said in a previous intervention, the magnitude of potential loss is in the order of 95 percent bank and 5 percent non-bank. That really is a huge, huge difference. So by allowing the banks to opt out, the Government is concentrating the risk on the part of some of the smallest entities, and vastly reducing what could be described as the premiums that are paid for that insurance.

But at the end of the day the Opposition believes that mum and dad investors need to be protected. There have been enough families ruined, and, sadly, tragically, there have been too many suicides by ordinary New Zealanders whose lifesavings have been lost due to the inappropriate management of risk and companies being caught by the international recession. We certainly want to send our condolences to any families that have been so affected. It is therefore of paramount importance to us that New Zealanders have the protection of a scheme like this throughout the duration of the recession and the early phases of whatever recovery is coming, and that is a key reason why we are supporting this bill.

The technical complexity arises in Part 2, and my colleague the Hon Lianne Dalziel put very eloquently that we think more consultation here would have been appropriate. The Minister has said it was a judgment call and the Government thought it would get the bill through. The Opposition’s point of view is that even a 1-week process to allow a select committee to question officials and get matters on the public record would have been very, very useful, as we look back on this experiment, if you like, in years to come.

But the bottom line is that there is no doubt that it is worth having a statutory power for the Minister of Finance to operate under, and it is recognised that the only reason why that did not occur prior to the last election was that Parliament had been prorogued and we were in an extraordinary situation. So no one wants to go back to the dark days of September-October. We do want to regularise this matter, and the Labour Party will be supporting this part of the bill. Thank you, Mr Chairman.

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

I acknowledge the previous speaker, the Hon David Cunliffe—

STUART NASH (Labour) Link to this

I will make one point with regard to Sam’s speech because he may have got the wrong end of the stick.

DAVID BENNETT (National—Hamilton East) Link to this

In regard to Part 2 of the Crown Retail Deposit Guarantee Scheme Bill, I will touch on a point that the previous speaker made. The previous speaker from the Labour Party was talking about a so-called risk premium. Basically he was saying that international investors will require the New Zealand Government to maintain the scheme, and that to get out of the scheme would be very expensive for our Government and our country. Well, that shows the level of knowledge of the financial system that the Labour members have. Maybe I was wrong. Maybe Labour members do need an inquiry, so that they can learn what is going on in the financial system. Maybe it should not have been an inquiry. Maybe it should have been an educational trip for the Labour members. Even better than that, maybe they needed to create a forum where they could discuss things, come up with a policy agenda, and write up a series of reports to file amongst the Labour Party so that they could be framed and members could say that they are some of the great leaders of the Labour Party, like Michael Cullen. He was known for doing a series of reports so that Labour members could be comfortable with some paper behind them. Unless they have paper behind them, Labour members do not care. They do not understand—

Hon LIANNE DALZIEL (Labour—Christchurch East) Link to this

I have been looking at the questions and answers that Treasury has released on the Crown Retail Deposit Guarantee Scheme Bill, and the concern I have is that they do not resolve one of the question marks I have over the whole thing. We have been talking about how urgent this legislation is, and how it must be dealt with under urgency. We are told on the Treasury website that there needs to be certainty so that people can act with certainty as soon as possible: “We want to give depositors and institutions certainty as soon as possible. Approvals for institutions to participate in the extended scheme are expected to begin from late September to early October this year.” So obviously this legislation is passed now, and by the end of the month or early next month we are into applications for approvals being lodged by institutions who want to participate in the extended scheme. The advice then states that details of institutions participating in the extended Crown retail deposit guarantee scheme will be published on the Treasury website. Essentially this is an answer to a question that a depositor or investor might be asking, such as: “Where do I find out if my deposits and investments are guaranteed now? How and when will I know if the Crown guarantee still covers my deposits after the scheme is extended?”.

One would imagine that we are rushing under urgency because there will be a relatively short period of time when applications for the extensions will be made, so that everyone can know whether their particular institution will be in the scheme. In fact, Amy Adams told the Committee that we had to deal with the bill under urgency because we were so stupid on this side of the Chamber that we did not realise that people made decisions a year in advance. But guess when applications for extensions close? If an institution does not have a credit rating yet, when is the latest that it can apply for the extended scheme? When do members think that might be?

JO GOODHEW (Junior Whip—National) Link to this

I move, That the question be now put.

RAYMOND HUO (Labour) Link to this

Part 2 contains the main seven clauses of the Crown Retail Deposit Guarantee Scheme Bill. Clause 5 enables the Minister of Finance to set the eligibility criteria for the extended scheme. This clause is very flexible and broad. However, it does not provide the eligibility criteria. Actually, the entire bill does not outline the eligibility policy; it merely provides the Minister with the authority to determine eligibility. Based on the broad terms indicated by the Minister at the end of August, the key eligibility criteria are likely to be that applicants must be in the current scheme—except for new banks and merged entities, at the Crown’s discretion—and they must have a BB credit-rating or above. Collective investment schemes will not be eligible for the extended scheme.

Labour members have some concerns about this policy. The first concerns the requirement that companies have at least a BB credit-rating in order to be eligible. The problem is that some companies might not be able to obtain a sufficient credit-rating, having insufficient scale to meet the requirements of the credit-rating agencies. Secondly, it could cause a shake-out in the non-bank sector, resulting in further finance company collapses and further losses for mum and dad investors, while the big banks move in to mop up customers. Thirdly, the banks are able to benefit from the wholesale guarantee, without being obliged to contribute to the retail deposit scheme. To that extent, it is fair to suggest that big banks may win twice. They pay less in fees and they get a greater degree of the market share at the expense of smaller institutions, which will no longer be able to rely on the guarantee and will fall over.

My having said that, we should remind ourselves that the above policy, which has caused us such concern, has added to the whole range of policy settings that shelter the internal economy at the expense of the traded economy. I was involved in the public hearing of submissions to the multi-party banking inquiry last week. For me, listening to the submitters across the board expanded my horizons. Let me quote what was said by Mr John Walley, who was representing the New Zealand Manufacturers and Exporters Association. It is relevant to what we are talking about regarding the bill: “Banks have grown faster than the surrounding economy, indicating wealth transfers from the traded economy to the non-traded economy.” Therefore, “the ‘must-trade’ imperative must be at the forefront of our policy design if greater investment, and consequently higher growth and productivity in the export sector, and ultimately our entire economy, is to be anticipated.”

It is worth noting that in 2008 the banks made consistent growth over time of around $3.2 billion—more than the entire NZX50 less the banks. I quote again: “We doubt this is either healthy or sustainable for our economy.” Thank you.

CRAIG FOSS (National—Tukituki) Link to this

I move, That the question be now put.

Hon DARREN HUGHES (Senior Whip—Labour) Link to this

I raise a point of order, Mr Chairperson. We have been on Part 2 for only a little over 30 minutes. It is the substantial part of the bill. It is a bill that the Opposition has not seen, it being introduced under urgency. There are other Opposition speakers; Mr Chauvel has just arrived, and wants to speak on this part. I think that for a bill that has not been seen by the Opposition and that has not been to a select committee, to accept the second Government motion of closure on the main bulk of the bill after a little over 30 minutes of debate is disappointing. I wonder whether you would consider accepting a few more calls, given that we are debating this bill under urgency.

Hon DARREN HUGHES (Senior Whip—Labour) Link to this

I raise a point of order, Mr Chairperson. We have now come to the title and commencement clauses of this bill. I think it is pretty fair to say we were disappointed by the shutting-down of the debate on Part 2 after such a short time, on a bill that we have seen only today and that did not go to a select committee, when other Opposition speakers wanted to take a call on it. You have been in the Chair all evening, Mr Chairperson, and you have sat through debate on Part 1 and Part 2, so you have heard a lot of the debate. Because you have heard Part 1, which influenced the debate on Part 2, I wonder what factors you are looking for here. This debate will be the only scrutiny this bill will get, and the bill is an important economic instrument. The Opposition wants to have an understanding of where you are coming from.

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

Debate on the commencement and title—by convention, as you have said, Mr Chairperson—is an opportunity for a relatively broad-ranging discussion of the key themes of the Crown Retail Deposit Guarantee Scheme Bill.

I will start with the commencement clause. The commencement date of the bill is 31 December 2011, which is the date the existing guarantee scheme continues until. That carries on from the earlier date of 12 October 2010. We have said that the decision to extend this commencement date to cover a period similar to the Australian legislation is appropriate because it avoids the risk of the flow of funds to Australian institutions. We have also said we think that the amount of time spent scrutinising the bill has been inappropriate. There has been no select committee consideration, and the time in the House has been under urgency. That time will be half a day, and it will be all New Zealanders will hear.

Many thousands of New Zealanders will be worried about their funds. As my colleague Lianne Dalziel has said, people want to know whether their fund is covered. They might want the opportunity to look it up on the Treasury website. Of course, they will not find the answer, because this bill is only framework legislation. It does not even vest the whole policy; that has to be promulgated by the Minister through the Gazette and regulations. The public does not have an opportunity to see how this scheme affects them. We know that for many investors, particularly those who have been burnt in the finance company collapses, this can be a matter of huge personal consequence. So the commencement date matters, and it matters because there really was time—and I think the Minister of Finance alluded to this when he took a call at the end of the debate on Part 1—if we had been pushed, to have a contracted select committee process. It is a disservice to the public that that process was not allowed, and I invite the Minister to take a further call. Perhaps he would be willing to change his mind at this point and allow a further process of some kind, perhaps some further consultation with the public, before he promulgates his regulations under the Gazette. That might be a compromise.

With respect, Mr Chairperson, I say that if the rest of the Part 2 debate had been allowed, we would have touched on the fact that the Minister has not taken any calls since Part 1. He has not taken a single call to defend the two key issues: why we are leaving the banks out; and, when the non-banks are in, why we are setting the threshold at BB. BB is an uncomfortable middle ground in some ways, is it not? For many, particularly smaller, finance companies, the cost and difficulty of process of going to a rating agency and getting a rating would be prohibitive. Some will not make the BB cut. I am not saying that the Minister is wrong to have signalled BB, but how would the public know? The Minister has not deigned to take a call and defend that key issue. The public deserves to know from the Minister why the rating is BB. Why not BB+, BB-, or BBB? It is sub-investment grade, but it is only just below. I ask the Minister whether that is the rationale. The public would like to know, because people will be worried about their own schemes and where they fall on the rating scale.

CHARLES CHAUVEL (Labour) Link to this

Mr Chairman—

Hon BILL ENGLISH (Minister of Finance) Link to this

I will just comment on a couple of questions that have been raised. One has been the issue of reducing the coverage per depositor. Like a number of the other measures, this needs to be seen in the context of the Government making it clear that the changes in the deposit guarantee scheme signal clearly a reversion to normal market conditions at some time in the future. It is entirely reasonable that alongside increasing the pricing of the guarantee, the Government has moved to reduce the cap on the deposits that it covers. As the regulatory impact statement points out, this has the effect of reducing the Crown contingent liability and, of course, reducing somewhat the fiscal cost of a future default event. It also has the effect that some of the smaller institutions that may be dependent on a few large deposits will have their circumstances altered. That is why we have reduced the coverage—because the deposit guarantee scheme is transiting towards normal market conditions.

Someone raised the issue of the BB ratings and the cost to small institutions of getting those ratings. That is not a function of the guarantee. The fact that non-bank deposit taking institutions will need to get a credit rating is a product of the new regulations that are coming through consequent on legislation that was actually passed last year. So the guarantee itself does not cause these institutions to get a credit rating; they have to do that in the next 6 months, anyway. In October next year the extended guarantee will pick up and use those credit ratings for the purposes that Parliament intended them for—that is, to signal to investors with more clarity the trade-off between risk and return in relation to putting deposits or other investments into these institutions.

Hon LIANNE DALZIEL (Labour—Christchurch East) Link to this

I want to focus on the fact that the statement that the Minister of Finance made in announcing the extension to the retail deposit guarantee included a list of all the changes that will take effect after 12 October 2010: the fees to be paid will be changed to reflect the institution’s risk profile, eligible bank deposits will be covered up to a maximum of $500,000 per depositor per institution, eligible non-bank deposits will be covered up to a maximum of $250,000 per depositor per institution, and deposit-taking institutions with a credit rating of BB or higher can apply to participate in the extended scheme. Then it stated that collective investment schemes will not be eligible for the new scheme.

I have looked through the regulatory impact statement and I cannot find a detailed analysis of why the decision was made that collective schemes will not be eligible for the new scheme. Under the existing scheme, collective investment schemes such as portfolio investment entities, unit trusts, and superannuation schemes are able to claim on the guarantee, provided that they invest exclusively in New Zealand Government securities, or debt securities issued by institutions covered by the Crown guarantee; they do not increase their investments in guaranteed institutions that are not registered banks beyond the level that existed as at 12 October 2008; and their rules ensure that any money paid under the guarantee will be distributed only to retail members. I thought those were a relatively tight set of criteria.

I did not download the number of schemes that have been approved, but on 25 August, when the extension was first announced, I had a look at the website and I seem to recall that a number of portfolio investment entities had been accepted and were guaranteed under the existing scheme. I would really like to understand the thinking behind the decision to leave out collective investment schemes altogether. There is not even the opt-in option any more but simply a decision that they will not be eligible. What was the thinking behind that decision? I am relatively sure that some of those schemes are currently under the guarantee. I think those institutions themselves would be somewhat concerned that there is not the detailed analysis that there is of some of the other examples that I have already used in my contribution to the debate.

It is quite a serious issue, because, as some of my colleagues have raised, the real risk is having too great an influence on investment decisions and distorting the market, as it were, in this whole area. I have been making the comment for a number of years now that we cannot get rid of risk, and that there will always be risk in this financial area, because otherwise there is no return. Then we introduced the retail deposit guarantee scheme, which somewhat diminished the argument I was always making. But the scheme is only a temporary measure and it is for an extreme situation. So it does raise for me the question of why it was decided that collective investment schemes would be left out. Has there been consultation with the operators of the different schemes? And what has been the response? I have looked through all of the issues raised in annex 3 and there does not appear to be any specific reference to collective investment schemes. I may be wrong. If the Minister would like to take a call on that, it would be very useful.

Hon BILL ENGLISH (Minister of Finance) Link to this

The member raised a reasonable issue. Retaining the collective investment schemes, as the regulatory impact statement points out, would not cause particular issues. There are reasons to exclude them. The investments in collective investment schemes are not actually deposits, and only a limited range of collective investment schemes are covered under the existing scheme. Like the other decisions that have been made in the detail of the scheme, in each case where there is some judgment to be made, the Government has made a judgment in favour of moving towards tighter and more limited coverage.