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 second time. Members who spoke during the first reading have covered, I think, the essence of the bill, and I welcome the broad support for it in Parliament.

I want to make just a couple of additional points as we move through the second reading. The first point is to make it clear that in passing this bill it is the Government’s intention to move, over time, back to normal market conditions in our finance sector. The details of the extension of the guarantee will show that the Government is moving the pricing of the guarantee somewhere towards what market pricing would be. However, we have given an extension whereby from today there will be a bit less than 2½ years until the guarantee expires around 2010 or 2011. That should be a clear signal to financial institutions that they should ready themselves for normal market conditions beyond that point.

The second point I want to mention is one that is often overlooked and has occasionally been confused in commentaries and in some speeches. The previous Government, following on from the finance company collapses, passed into law a new regulatory regime for the non-bank deposit-taking institutions. That regime will come into place over the next 6 months or so. The regime involves more direct supervision by the Reserve Bank, liquidity requirements, and capital ratio requirements, as well as a requirement for credit ratings. It is quite important to understand that that process is separate from the guarantee. It will require those institutions to meet higher prudential standards than they did before. So the extension of the guarantee will raise the hurdle, but that does not occur until after October next year. Between now and then, credit unions, building societies, and finance companies will be required to meet the standards set by the non-bank deposit-taking regime. That has been the subject of extensive consultation with the industry, which was begun by the last Government and has been continued by the Reserve Bank under this Government. The sector is fully aware of what kind of requirements there will be. It has had the opportunity to discuss and, in some cases, disagree with them.

It is important to understand that those two processes, although related, are actually separate. I expect that the challenge posed by the non-bank deposit-taking regime is more immediate than the change in the conditions of the retail deposit guarantee that we are legislating for today.

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

I rise in support of the bill, and in so doing I draw attention to the fact that this is one of those processes that the public often say they like to see, and rarely do see, and by that I mean the major parties cooperating on issues of major importance across the House. I begin my remarks by thanking the Hon Bill English, who, when he was doing my current job—that of Opposition spokesperson on finance—was honourable in his cooperation with the then Minister of Finance when the first scheme was set up, before the election. We would like to acknowledge that, and we would also like to acknowledge the courtesy the Government has extended to the Opposition in briefing us on the introduction not only of the bill but of the policy. I thank the Minister and say that that has enabled us to form a more balanced view of proceedings. If I might express a hope, it is that this will not be the last time that we are able to cooperate across the House on matters of major economic importance. I think all members of the Parliament are agreed that New Zealand faces difficult times in a fragile world, and, of course, we cannot have it both ways. It cannot be the case that this is the worst of all recessions and it therefore justifies any response, and that, at the same time, a thousand flowers have now bloomed and it is all hunky-dory. It cannot be as easy as that, and we are happy to cooperate with the Government, within reason, on trying to work through some longer-term solutions that get us away from some of the cycles and roller coasters that may have made this recession more severe than it might otherwise have been.

Let me touch briefly on a couple of the issues that have been raised in recent contributions to the debate. If I might, I will pick up where the Minister of Finance left off and thank him for raising the issue of the contemporary regulation of the non-bank finance sector, which is something I was going to cover, in any case. Three pieces of legislation were carried forward by the previous Government: the Financial Service Providers (Registration and Dispute) Act 2008, the Financial Advisers Act 2008, and the Reserve Bank Amendment Act of 2008. They had three interlinked objectives that are relevant to the situation we now find ourselves in. The first was to register financial service providers, and the second was to register and provide rules of the game for financial advisers, who had too often been front-door salespeople for pre-packaged products from the finance industry, and not at all independent advisers acting in the interests of their clients. I say that not to besmirch any individual, but to say that there were structural problems with the way the industry was set up.

Finally, the Reserve Bank Amendment Act extended, for the first time, the prudential supervision role of the Reserve Bank into the non-bank finance sector, and, as the Minister has rightly said, in many ways that provides higher standards of supervision than are required in this framework legislation, which specifically applies to the retail guarantee scheme. That is to say that that is all work in progress; that it has transcended the change of Government, and that we all agree it is in the interests of the country, is so much the better.

Let me come on to some related issues, which I believe also require bipartisan consideration. These are some of the matters that were raised by submitters in the recent banking inquiry. Leaving aside the fact that the Government did not want the inquiry to happen, it has happened. There were a large number of submissions, and there was a very strong consensus among submitters: firstly, that the official cash rate was not working, because much of it was locked into fixed-term mortgages, so it was not able to respond quickly enough to catch the business cycle or the property cycle; and, secondly, that the official cash rate was not being fully passed through, and therefore to achieve a given amount of sterilisation of economic cycles the Reserve Bank had to have greater amounts of either upward or downward movement of it, allowing for the discounting process from the banking sector.

Many submissions said that the housing bubble was big and dangerous and likely to happen again, and from that arose the question of whether the official cash rate on its own is a sufficient tool to address that, or whether it needs to work hand in hand with additional monetary policy instruments, savings policy instruments, or possibly tax instruments, which potentially could operate to create a more level playing field. These are big, important, and difficult issues, which require careful long-term thinking. Some of it may emerge from the Government’s tax review working-group. We will be watching with interest as the banking inquiry reports—to see what emerges from that—and hope there will be an opportunity for more discussion in the national interest across the House.

I come back to the structural elements of the Crown Retail Deposit Guarantee Scheme Bill that is before the House today. It is structural, skeletal legislation. It provides powers to the Minister of Finance, and the Minister has outlined how he plans to use them in the short term. The Minister has made it clear that it is a stepping stone towards unwinding a scheme that was brought in quite rightly by agreement to address a specific set of problems at a specific time. We are all agreed that we need a strong financial system. We are all agreed that the scheme was a good way of maintaining that, and that it makes sense to extend the scheme. It is appropriate to extend the scheme for a further year under structured conditions to match the timetable of our colleagues’ scheme across the Tasman.

What this says, however, is that all the finance companies—the non-bank financial institutions—will have to meet interest costs and they will have to get themselves rated by a credit-rating agency. A previous Labour speaker, Mr Stuart Nash, pointed out that the process of rating can be difficult, that some, due to reasons of scale rather than viability, may not qualify, and that that could perversely contribute to their falling over, to the detriment of many ordinary New Zealanders who are depositors in those schemes. We will watch with interest and care as this is implemented, to ensure that there are not any side effects that are worse than the disease that it seeks to cure—the level of risk that exists in the first place.

We have said it before, and I want to repeat it, that one area where we depart from the Government is in the treatment of the major banks in this scheme. Under the previous Government we made it clear to the banks that they would need to participate in both the wholesale and retail schemes, if they proceeded with either; that spread the risk, and it meant the Crown, the taxpayer, was better compensated for that risk. By signalling to the banking sector that it is all right for it to participate only at wholesale levels, we believe that that is narrowing the fee base, concentrating the risk in the non-bank financial sector, and thereby elevating the average level of risk on the taxpayer. We ask the Government to seriously consider that matter: whether it is not worth having a further set of conversations with the banks along the lines that it would be better if they maintained a presence in both schemes, if they remained in one. We have said it before, and I will repeat it, that in other respects it would appear that the Government is treating the non-bank finance sector with a rather sterner stick than that applied to the major banks.

AARON GILMORE (National) Link to this

I rise to support the second reading of the Crown Retail Deposit Guarantee Scheme Bill. I want to touch on a few things: the timing, the rules of engagement, and the industry acceptance. I am pleased that everybody in the House today is wide awake and listening to the debate on this bill.

I want to firstly touch on the timing of this bill. At the moment we are having discussions, particularly out of the US, on the so-called green shoots of economic recovery. I think the previous guarantee scheme had an expiry date of October 2010. Many people who invest, particularly those who invest in non-bank finance companies, invest for a period of about 12 months, so we are nearly getting to that period of 12 months, and between now and the end of that scheme people will start to make a decision on whether they reinvest their funds. That makes it quite an appropriate time to take the opportunity to get this revised new scheme in place to take over and extend through to December 2011. One of the reasons I look forward to that is that those green shoots by that time, having gone from being a planted seed to green shoots, should hopefully be a beautiful rose bush that we can harvest and hand out to the wonderful people of New Zealand. It has been mentioned that one of the reasons for a finishing date of a little over 12 months is to align better with our friends across the Tasman in Australia. As someone who has spent a number of years in the financial capital markets I say that it is critical, given the tight time frames and links that we have with Australia, that there is as much alignment as we can possibly get. I think that is of significant benefit to New Zealand savers and investors. However, as many speakers in the first reading and previous speakers on the second reading have mentioned, this benefit to investors and savers does come at some cost—there is no free lunch.

This scheme has been redesigned from the existing scheme; hence the reason why we have a brand new bill. The scheme grants the Minister of Finance specific powers to develop rules of engagement—as I call it—under which the scheme guarantee would apply. Importantly, the scheme—as I mentioned—comes at a cost; it will require participating companies to pay some sort of fee, as well as have what is known as a BB credit-rating. I want to spend a little bit of time on this issue of credit ratings. There is a little bit of confusion, I think, in the House today. A BB credit-rating as provided by the largest credit-rating provider in the world, a company called Standard and Poor’s, actually implies an investment that is below an investment grade; a typical investment grade is commonly known as BBB-. By giving a rating of BB, Standard and Poor’s implies normally that an investment is a speculative type of investment, not an investment of investment grade—not a safe investment—but a speculative investment with perhaps, based on normal work, a 25 percent chance of failure. That shows an interesting aspect that has not really been picked up by any previous speakers: that this guarantee cuts in at quite a relatively low level with quite a high speculative rate for investment.

The members on the other side of the House say that the cost of getting such a grade from a credit-rating agency like Standard and Poor’s is too expensive to participate in this scheme. I say to the members that this bill actually removes the compulsion to be in this scheme. It is absolutely optional for participants to take advantage of the scheme should they wish. To take up the advantage of a credit guarantee, obviously, participants have to spend some money. It is also interesting that no one has touched on the fact that the scheme is available only to participants currently in the existing scheme or to mergers or changes of companies that are in the current scheme. As far as I am aware, nearly all the participants currently in the scheme already have some form of credit rating.

Interestingly enough, also, the cost to take up the option of the scheme is relatively low, relative to the size of some of these companies. Most of the non-bank financial institutions in New Zealand that are of any note have anywhere between $100 million and above in assets. The cost of gaining a credit rating from entities such as Standard and Poor’s is somewhere in the region of about $100,000, and thereafter ranging from $100,000 to $200,000 per annum. Relative to an asset base of $100 million, it is quite a small cost for the opportunity to take advantage of this scheme. I think that most of the 19 finance companies that have collapsed in the past 2 to 6 years were small finance companies worth under $100 million in invested total assets. It just shows us that one of the reasons why that cost exists is that larger companies can pay the $100,000 and often they survive in many ways.

I will touch on a couple of things. I had the pleasure of giving a speech recently to a group of people from the Financial Services Institute of Australasia (FINSIA). FINSIA is the leading organisation for those who are involved in the financial sector, particularly in Australia. I am proud to be a member of the organisation.

Hon CLAYTON COSGROVE (Labour—Waimakariri) Link to this

I will not take up much of the House’s time because I think a lot has been said. There is cross-party support for the Crown Retail Deposit Guarantee Scheme Bill, but I note—as I did in the first reading debate—that the Opposition has some concerns. The member Aaron Gilmore made a variety of comments about small institutions. The concern we have is that the bill does not outline the eligibility policy. That is left to the Minister and provided for under the Minister’s authority to determine eligibility. The issue we have some concern about is the situation of a number of smaller institutions, which the previous speaker spoke about in his wonderful speech, which, presumably, was akin in his own mind to the Gettysburg address. Mr Gilmore is a member of everything and has done everything. Some people wonder whether he has fixed his “I” problem—“I’ve done this, I’ve done that, and I’ve done everything.” Maybe he has not. He is not concerned about the smaller institutions and companies that may not have the capacity, for instance, to meet the requirements—although he thinks that all one has to do is cough up a bit of money and the rating agency will gave them a rating. Well, it is not as simple as that.

In order to achieve a BB rating, a company or institution has to be up to the mark. I am advised that it is quite an exhaustive process. It is not like ordering a double meat burger and chips from McDonald’s, as that member may be wont to do. A company or institution does not just pay money and get a rating, just as one does not just pay money and get a degree; it has to pay the money and then go through an exhaustive process. That is why those credit-rating agencies are particularly credible. A number of smaller companies and institutions have insufficient scale to meet the requirements of those credit agencies, which in itself can create instability. If they cannot meet the mark and they cannot then get that guarantee, does that become a shakeout scenario in the financial sector?

Again, as I said in the first reading debate, no one would wish companies and institutions to fall over and for mum and dad Kiwi investors to be left in their wake. No one is predicting that, and no one would want it. We are simply asking the question whether, if the smaller institutions and finance companies do not meet the mark, it is possible that, in a financial investment sense, there may be flight from those companies to larger institutions, thereby bringing about the potential collapse of those smaller institutions. Who will be left to mop up what is left? It is the big Aussie banks and the big end of town that National seems to be particularly concerned for. The banks are able to benefit from the wholesale guarantee without, as I understand it, being obliged to contribute to the retail scheme.

The member Aaron Gilmore mentioned the banking inquiry. Mr Gilmore is the learned professional who has done everything, been a member of everything, and knows everything, by his own admission. I wish I was half as good as he thinks he is! I would have thought he would acknowledge that it is appropriate, given the public perception around banking—whether that public perception be factual, misguided, or incorrect—to have a bipartisan banking inquiry, as I said in the first reading debate. We had a banking inquiry. It was non-partisan for the three parties that participated in it—the Greens, the Progressives, and Labour—but there was a refusal by National, ACT, and a few of the others that linger around this place to even participate in an unofficial, if you like, informal inquiry, let alone a full-blown parliamentary select committee inquiry. Such an inquiry—I think we all agree—would have been the best option because it would carry with it the authority of Parliament.

The question I raised in the first reading debate—and I raise it again now—is why any party would object to such an inquiry unless there was something the party did not want us to know, unless there was something it did not want this House to expose, or unless it did not suit its political purpose for us to have a thorough examination of the sector of our economy called the banking and financial sector. I cannot, for the life of me, see where the politics in this particular question would be, because the truth is that Kiwis—rightly or wrongly, and it could well be wrongly, I concede that—hold the view en masse that they are not getting a fair go from many of the participants in the financial and banking sector. As Kiwis look across the ditch to Australia they perceive that our official cash rate reductions are not being passed through as swiftly as those of our Australian cousins. I think it was worth it to have a crack at looking at that. In fact, it would have been one of the finer moments of this Parliament if we did not play politics but just said that that is an issue New Zealanders are concerned about. In a recession the mortgage bill tends to be the biggest we face. That was a moment in Parliament when we could have dealt with something without politics and see what comes out of it.

There is now a big debate around how we deal with inflation. There is a big debate with our manufacturing sector as it struggles with the high dollar and as it struggles to export and be competitive with its counterparts in other countries. There is a huge debate about how we can continue to control inflation and how, if we choose to, we incentivise, or perhaps disincentivise, different forms of investment in the non-tradable economy as opposed to the tradable economy. I would have thought that was a simple proposition that would not have taken a lot of steam or political venom to discharge, but it appears that it was not. I think that lessens this place and some of the participants here in Parliament.

We support this bill. It is a measure that, as other speakers have said, will indeed reinforce stability. The question I have with this Government guarantee is that, contrary to what some people have said, the big end of town will benefit, because it has a guarantee. I think Mr Foss and others said the shareholders of the larger Aussie-owned banks will benefit. Any institution that has a guarantee has greater stability and greater confidence, which is therefore seen by those who may invest in it—that is, the shareholders. Generally—in my world of market economics anyway—that encourages an increase in the share price as a vote of confidence in a company or bank that holds that Government guarantee. I do not think we should delude ourselves by saying that the bill will not benefit shareholders and banks. Give me a break; of course it will. But the question is whether it will have a counterbalancing effect, because the bar is very high—a BB credit-rating—for the non-banking institutions that may not have the scale to meet the mark. I will conclude with those points and reiterate that we support the bill with those reservations and points made.

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

I rise to speak on the Crown Retail Deposit Guarantee Scheme Bill. As I said in my first reading speech, the Green Party supports this bill. The Green Party supports the deposit scheme. The scheme was introduced because it was essential in order to maintain confidence in the banking sector in the middle of a global financial crisis. We support a time-limited extension of the deposit scheme, and, hopefully, a phasing out of the deposit scheme over time.

For me, it has been most interesting in this debate to listen to members of the Government speak as if being part of the financial sector was something they were championing, and as if they should be proud to have come out of the banking sector. Well, as a matter of fact, the banking sector collapsed the global economy. That is a basic reality. Members opposite are saying that somehow the banking sector is still the master of the universe, even after taxpayers of the entire world had to put their hands in their pockets to bail out the banking sector. It seems to me extraordinary that people in the House say we should somehow worship at the feet of banking executives, when they have demonstrably proven they do not know what they are doing.

This bill is part of the bail-out in which the taxpayer had to get involved in order to save the financial sector from itself. Of course, we have gone through periods like this before. During the Depression and the postwar period the people and the Governments of the world had to intervene to stabilise the system. Once again, the people and the taxpayers of the world have had to intervene to stabilise the system, and that is exactly what this legislation will do, along with the wholesale guarantee scheme. It seems to me that if taxpayers have to intervene to save banks from bank executives, who made such a complete mess of the banking sector, then surely the quid pro quo should be that chief executive officers’ salaries should not be obscene. It is obscene that in our country the chief executive officers of banks earn millions of dollars, while ordinary workers, who are the foundation of our economy, have very, very low wages. Why do ordinary workers have to pay taxes to underwrite banks while the chief executive officers of banks, who got us into the global financial crisis, earn millions and millions of dollars? That is obscene and unacceptable.

Why do banks continue to make very large profits on their interest margins? Banks lost some money because they invested in firms that turned out to be bad investments. They made poor decisions about which firms to invest in and they lost quite a lot of money, so they have had to put quite a lot of money aside. Although they have put all that money aside, however, they still make very large amounts of profits on the interest spreads—the interest margins they charge people. Profits on interest are still up on last year, in spite of what members might have heard. Why do taxpayers have to pick up the pieces through legislation like this because bank executives are so useless that they made a complete mess of it? Why do taxpayers have to pick up the pieces, yet the treatment of bank staff is still appalling? We are sending jobs in the banking sector overseas. One would think that as long as the New Zealand taxpayer is underwriting and supporting the banks, the banks would keep jobs in New Zealand. But they are not: they send them overseas. One would think that as long as the banks are being underwritten by the New Zealand taxpayer, they would change some of the practices around pushing loans and money on to people who cannot afford them. Surely banks would pull back on the system they have set up to incentivise their employees—pushing on them the idea that they have to sell more loans to people who cannot afford them, which is part of the reason why we are in the mess we are in—because the taxpayers are underwriting this system.

The other part of this issue, as I talked about a little bit in my first reading speech, is that we need some solutions to deal with the fact that we have just been through a debt-fuelled, consumption-led boom. We saw house asset prices double over the space of 2002-07, which was a completely irresponsible policy on the part of the Government at the time, in that it did not intervene and do something about it. The current Government cannot be held responsible for the ridiculous boom in housing prices, which has made housing unaffordable, but the current Government is still not changing the policy settings to do anything about it. It is all very well for Bill English to say it was a debt-fuelled, consumption-led boom—I agree with him—but we need to change the policy settings to do something about it.

We know the changes we need to make. We know that investment properties and the tax incentives to speculate in housing were one of the key drivers. We know that is a simple fact. Every tax adviser across the country was telling people to invest in investment properties in order to reduce their tax. We can change those rules. Those rules are within the Government’s purview to change, and I encourage the Minister of Finance to follow through and do that.

We also know that we can change monetary policy. If we are to maintain the stability of the banking system, not to mention the stability of the New Zealand economy, we need to change monetary policy. Relying on the official cash rate has been a bit of a disaster. All we did when we increased the official cash rate was suck foreign capital into New Zealand, which the banks then loaned on to the housing market. The safest way banks could think of to make some money was to push it into the housing market. Instead of giving it to New Zealand businesses, which could have used it productively, the banks were good only at passing on loans into the housing market, because it is easy and simple to do. Houses continue to increase in price, so the banks just loan money into the housing market. The hard thing to do is to back small to medium sized businesses in New Zealand that want to borrow money to invest in productive enterprise, so they can compete with imports and so they can export. That would be a responsible and useful thing for the banking sector to do; simply borrowing billions and billions of dollars from overseas in order to push that money into the housing market asset inflation was not in the best interest of our country.

On one hand we say that we will give banks a bit of a hand, because we have no choice. We cannot afford to let the banks fail. They are too big to fail as they are fundamental to our economy. On the other side of the equation, we need to regulate banks in order to make them useful to us. It is useful to us for banks to loan money into the productive sector, not to put more and more money into a housing asset bubble. One of the ways we can make banks useful to us, if we have the courage to do it, is to intervene directly in terms of Reserve Bank ratios. This has been discussed in a number of places. It is a mechanism whereby for every dollar the banks put into any sector we identify as an asset bubble, such as the housing sector, the banks have to deposit a proportion with the Reserve Bank, whatever percentage that is. The effect of that mechanism is that it makes it harder for the banks to shovel foreign currency through into whatever particular asset bubble one is concerned about. In particular, the housing market has been the asset bubble. Using reserve ratios overseen by the Reserve Bank is one way to try to restrict the flow of foreign capital borrowed from overseas into the housing asset bubble, and speculation in the housing market. These tools are available if the Government has the courage to take them on.

If the Government has the courage to do more than say that it will cut red tape, which sounds really great, or that it will try to free up the productive sector, then I ask what will it really do. If we really want to intervene in the sector, we need to reduce the level of the New Zealand dollar. One of the key things driving up the New Zealand dollar has been the official cash rate. It has kept the New Zealand dollar high. We should reduce interest rates. Again, the official cash rate has been one of the drivers of interest rates, amongst other things. In order to reduce interest rates, we need to target inflation in the housing market. The official cash rate is a very blunt instrument when we use it to try to suppress inflation right across the economy. It drives up the New Zealand dollar and it makes it difficult for New Zealand productive businesses to borrow money. It would be much more effective to target the housing market itself and then to make capital available for New Zealand business who actually need to borrow money to produce things. In the process, we would reduce the level of the New Zealand dollar and reduce interest rates to the productive sector. All of these things would make a significant difference.

This bill is fine as it is, but we need to have a broader policy debate about monetary policy, financial instruments, and the stability of the New Zealand economy and the New Zealand banking sector.

JONATHAN YOUNG (National—New Plymouth) Link to this

Investors and depositors still remain nervous in New Zealand, and it is at times such as this time that Governments need to act in order to bring stability. This Government has sought to protect New Zealanders through the turbulent economic times we have been through and continue to face.

Recently, the New Zealand Herald reported that John Kidd, a McDouall Stuart analyst, had said “The Government must provide some clarity around the future of the retail deposit guarantee and soon to minimise uncertainty and avoid another looming funding crunch in the beleaguered finance company sector,”. The New Zealand Herald reported further that “After being starved of retail investor money after a string of high-profile failures in the sector, the introduction of the guarantee in October last year saw a flood of cash into finance companies. But there has been no official word on whether the scheme will be extended when it expires in October next year. Because of that, investors have been reluctant to invest further in finance companies for terms beyond the scheme’s expiry date.” That is a concern. It is good to note that the Minister of Finance, the Hon Bill English, is responding not only to the international situation but also to the needs of the finance industry here in New Zealand, which will continue to fuel and finance our recovery out of this recession in the years ahead.

The Crown Retail Deposit Guarantee Scheme was instituted in October 2008 in the wake of a growing sense of uncertainty regarding deposits. As we walked in step with Australia, New Zealand also, under the previous Government, set up a retail deposit guarantee scheme. It followed other measures of the Reserve Bank to ensure liquidity at that particular time. Apart from protecting depositors, the guarantee also afforded banks and businesses with a sense of stability during those troubled times that we experienced, by ensuring investor confidence. A number of changes are coming up in this bill, which others no doubt will allude to, but some of the changes are to bring some transition back into normal business practice. This means that people or companies such as banks and other institutions that take the step into this extended scheme for a further 14 months will, at the end of that period of time, come back into normal finance and business practice.

Thank you, Mr Speaker. I am happy to commend this bill to the House.

KATRINA SHANKS (National) Link to this

It is my pleasure to take a call tonight on the Crown Retail Deposit Guarantee Scheme Bill. This is an interesting bill, because it is a continuation of a scheme that we already have in place to address the issues around the confidence that our investors have with the banks that they deposit with. We know that a year ago there was real concern around the viability of many of the overseas banks and financial institutions. There was concern that investors were withdrawing their money and that they did not have any confidence in the banking system.

I will address the comments that Russel Norman made earlier, and to be honest, I do not quite know where to start. At the end of the day, it was the strength of our banks down here in New Zealand that helped our economy along. We did not have our banks folding. We had relatively strong banks, and the Government got in behind the banks and put in a retail deposit guarantee scheme to ensure that our investors will have confidence in the banking system in New Zealand.

This bill has extended the current scheme until 31 December 2011, which is an extension of another year. The current scheme was to expire on 12 October 2010. We were finding that there was a lack of confidence around the uncertainty of what would happen to these deposits, so we have continued that scheme in order to help out our economy.

We realised that if people do not invest in our economy, then we will not have any growth. That is what it is about. John Key’s Government is about getting some bounce out of this recession, so that we can get some good solid growth. It is so that we can be leaders going forward with our very strong economy and our export markets, and we can ensure that we get cutting edge technology and cutting edge businesses. We are out there at the front end, getting our fair share of the business that we should be getting in those areas.

It is really interesting to find out that currently there is $120 billion worth of guaranteed deposits in total in existence, over 73 institutions. There has been a big take-up of the retail deposit guarantee scheme and this will continue. It was my pleasure to take a call on this bill this evening. Thank you very much, Mr Deputy Speaker.

MELISSA LEE (National) Link to this

It is a pleasure to rise and take a short call on the Crown Retail Deposit Guarantee Scheme Bill. Already many members have spoken on this bill, but I want to add my tuppence worth to make a couple of points. I was trying to get to the House this afternoon to watch some of the debate that was happening and I was quite appalled. Let me start by saying what a load of hogwash from Labour! Apparently it is supporting this bill and it feels the need to blame others. Let me remind members opposite that the mass financial company failures—some 30 financial institutions—happened on its watch, when Labour was in Government. I ask members whether we are all glad that the 9 long years of Labour taking New Zealand around the bend and then down the gurgler of the OECD rankings are over and that we have a great Prime Minister, a fabulous Cabinet, and a caucus who are focused—yes, focused—on getting New Zealand back on track.

STUART NASH (Labour) Link to this

I rise to speak in support of the Crown Retail Deposit Guarantee Scheme Bill, as I did in the first reading, for a number of reasons. I was interested to hear Melissa Lee emphasise this Government for the whole of her speech, and how this Government is responsible for guaranteeing the deposits of ordinary New Zealanders. Ms Lee has a very short memory. In fact, Dr Michael Cullen instigated this bill under urgency. Dr Michael Cullen was one of the great Labour politicians who believe in listening to the people. He understood that hundreds and thousands and millions of dollars had been lost by New Zealanders due to the collapse of financial institutions. He went around the country with people like Phil Goff, Annette King, and Maryan Street, and they spoke to constituents around their electorates. They realised, after hearing the stories about people losing their life-savings, that something simply needed to be done. So I tell Melissa Lee that the National Government did not do this; it was a Labour Government measure.

This bill is going through under urgency at the moment because the National Government did not get off its chuff and sort this thing out. The current retail guarantee expires in about 4 weeks. It was set up for 1 year. We are debating this bill under urgency so that the extension of the scheme will be in place and will give a high level of stability to the mum and dad savers who rely on their savings for their retirement. We all know that the Government will cut superannuation and raise GST. Bill English’s Tax Working Group has said that it thinks it would be a great idea to raise GST to 15 percent, maybe 17 percent, or even 20 percent. It wants to do that so it can drop the top tax rates from 38 percent and 33 percent down to 30 percent. How will that help the vast majority of the people of New Zealand? How will that help superannuitants? That is why Dr Cullen brought this deposit guarantee scheme in.

There is a fundamental difference between the groups of people who were losing the money they had invested: there are savers and there are investors. Savers are the people who had put their hard-earned savings—which they had built up over 30, 40, 50, 60 or many, many years of working hard and paying their taxes—into these funds, only to see their savings wiped out. Savers do not necessarily price risk like investors do. Investors are professionals who understand risk, or are supposed to, and therefore invest appropriately. They understand that risk equals return, whereas savers—mum and dad investors who lost all their money in the financial sector—were not pricing risk; they were putting their money away ready for their retirement, for their children’s education, or for their grandchildren’s education. As I alluded to in some of the examples I gave earlier, we are seeing the downside of the collapse of the financial sector in terms of the increase in ill health and decrease in the well-being of a huge cohort of New Zealanders. I spoke of at least two people who had committed suicide because they had lost their life-savings. I spoke of the tremendous hardship and mental anguish of those New Zealanders. Melissa Lee smiles, but I do not think the issue is particularly funny or worth smiling about. Many, many Kiwis have suffered, and this deposit guarantee scheme will alleviate a lot of the anguish and harm caused to many people who have their money invested at this time.

I support this bill for two reasons. First, it is about ordinary New Zealanders, whom members opposite tend not to understand. I cannot believe that when we are talking about New Zealanders who have committed suicide because they have lost their life-savings, we see some members opposite smiling and clapping. Quite frankly, that is one of the saddest things I can imagine. I read about it in the New Zealand Herald and I thought: “Goodness me! Imagine if that had been my parents.” Let us imagine that it had been our parents who had lost their life-savings after paying taxes for 50 years. Imagine them seeing their life-savings suddenly wiped out and being told to sell their family home to pay their debts to those blokes who are living the high life in Sydney. I do not think that is fair.

Dr Cullen did what all good Labour politicians do: he remedied the problem. He came up with this retail deposit guarantee scheme, which said that the Government of New Zealand would guarantee the deposits made by good, hard-working, ordinary New Zealanders. He put this scheme in place in the space of 24 hours. How do I know this? I was at a Taradale branch meeting. Michael Cullen was one of those MPs who go to every branch meeting in his or her electorate. My God, they were great meetings! We heard Dr Cullen, the then Minister of Finance and also Deputy Prime Minister, talk about what was going on. Once, for the first time since I had been in Hawke’s Bay, Michael Cullen sent an apology to that meeting. We thought that something serious must be going down, because Michael Cullen always attended those meetings, just like every good Labour Cabinet Minister. We woke up the next day to find out that he had been working for the last 48 hours, without sleep, with his Australian counterpart, the legislators, and the Secretary to the Treasury to come up with a scheme that he could take to ordinary New Zealanders and tell them not to worry. They could sleep easy because he guaranteed that, if any of these finance companies collapsed, people would not lose their money. He went back and, as Minister of Finance, said that the Labour Government would guarantee that people would not lose their money.

That scheme put in place the fundamental philosophies of social democracy. The fundamental philosophies of social democracy are to look after ordinary Kiwis who have saved hard, who have paid their taxes, and who have saved for a rainy day. That is what Dr Cullen did, and I think it was fantastic. Now we are debating this bill, which will extend that scheme. I really support the bill and I commend Mr English for understanding the value of it. But I think Mr English sees just the financial side of things as opposed to the hardship faced by ordinary New Zealanders.

The second reason I support the bill is that it shores up the banking system. I was at the banking inquiry and it was very interesting. I take my hat off to the chief executive of Kiwibank.

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

I am happy to speak on the second reading of the Crown Retail Deposit Guarantee Scheme Bill. I am pleased that the Government has decided to introduce this bill and to deal with the issue in a legislative way. However, I am deeply concerned about the bill being dealt with through all of its stages here in Parliament under urgency. The reason that I am concerned about that is that there is no opportunity for any of the institutions that will be affected by this bill to have any public input into it by way of submission to the Finance and Expenditure Committee. The select committee does not have the opportunity to give detailed consideration to all of the elements of the bill.

I am also quite concerned to pick the bill up off the Table of the House, as I come in here this evening, and find that the regulatory impact statement is not set out in full in the bill. It is, in fact, to be found on the Treasury website, if I want to go and read it. That is what I will have to do now over the tea break. Giving this speech at one end of the tea break obviously gives me an opportunity to comment on it when I return. But the problem I have is that that means the legislation will not get the degree of scrutiny that it deserves.

JOHN BOSCAWEN (ACT) Link to this

It is a privilege to speak on the second reading of the Crown Retail Deposit Guarantee Scheme Bill. What I say tonight I say in the public interest. The basis of a financial system is confidence and trust. The reason that this measure was initially introduced last year was a total fall in confidence in the world banking system, not just in New Zealand but throughout the world. We saw that manifest itself in the failure of many finance companies. Reference was made this afternoon to, I think, some 16 finance companies. Well, over 30 finance companies went into receivership or a moratorium. I have spoken at length on this subject over the last 6 months.

Tonight I would like to talk about one specific finance company, and about the issue of confidence and trust—trust in the financial system. Mr Cunliffe, in his first reading speech, talked about the banking inquiry that the Opposition organised. He referred to the front page of the New Zealand Herald business section of 15 July, calling on the Government to support that inquiry. It is interesting that on that same page of the business section, tucked down in the bottom left-hand corner, there was an article about a company called Strategic Finance.

Hon DAVID PARKER (Labour) Link to this

I rise to take a call on the second reading of the Crown Retail Deposit Guarantee Scheme Bill. Before addressing the bill in particular, I will add to some of the comments made by Mr Boscawen. I hope the inquiry being undertaken into finance companies looks at some of the related party transactions of some of the finance companies that acted wrongly. I will be interested to see what the inquiry finds in relation to any of the personnel who were involved in those transactions, which were effectively fraudulent related party transactions whereby finance companies were getting money off people, then lending it to themselves in other guises in high-risk ventures, sometimes with limited liability, so that if the loan could not be repaid by the corporate borrower that was related to them, there was no recourse to the personal covenant of the person who was behind the company. If it transpires that that was a pattern of behaviour, and it further transpires that the individuals who were involved were some of the individuals who were involved in similar transactions in the last crash in the late 1980s, then I would suggest that some of our regulatory agencies like the Serious Fraud Office should take a close look at themselves and see whether they did their duty during that period. It is all very well to be wise with the benefit of hindsight, but some of those agencies had a duty to be looking into those issues before they were obvious to everyone. So I agree with some of the things that Mr Boscawen was saying.

But having said that, I point out that we also need to be careful that we do not tar everyone with the same brush, because just as there were some irresponsible finance companies, there were also some reasonable finance companies that acted responsibly. It is a truism that no financial institution can withstand a run on the fund. That is true of a finance company; it is also true of a bank. I think banks, in the fallout from the international financial crisis, have at times been a little bit cute in pretending that they have been immune from the effects of a run on the bank, and in pretending that people would not have had their money at risk in banks. Although it is true that that money might not have been as at risk in a bank as it might have been in some finance companies, it is also true that, were it not for the Government guarantees that were provided at both the wholesale and retail levels, there could have been a run on the banks. Those banks could no more have withstood that than a finance company could have withstood a run.

So it was necessary for the prior Government to intervene and to provide some certainty to lenders, and to depositors to banks and to other non-bank financial institutions, to ensure that they did not get so frightened that they all withdrew their money at once. That would have caused the demise of the banks and the finance sector, it would have caused a loss to all of the deposit makers, but it would have also caused the wheels of commerce to grind to a halt, to the detriment of the economy in a wider sense and not just to the detriment of those who had invested in deposits in those banks and finance companies.

Having said that, I return to the issue of the distortions caused by guarantee schemes such as this. I note that one of the objectives contained in the general policy statement in this bill that the Government has introduced is to minimise economic distortions and to ensure in the credit markets that we have properly priced risk—it is called “well-priced credit markets”. It is a sad reality that whenever we have a guarantee scheme like this, we have distortions. There are distortions in the market that are unavoidable. One of the distortions we have here is that collective investment schemes are not eligible to have a guarantee, despite the fact that the nature of the underlying transaction is very similar to other schemes that are not collective investment schemes, but that are essentially deposits made by people and things like unit trusts or group investment funds. The money is invested by people in the fund and then invested by the fund in mortgages, often first mortgages over land.

Those sorts of credit instruments are more secure than a finance company investment, because a finance company investment is generally a first or second-rating debenture stock, which often gives a second-tier interest in securities behind other creditors, whereas some of these group investment funds and unit trusts, which are backed by first-level mortgages, give the investor a trust interest in the mortgage. If we look through the paper, we see that they are effectively obtaining a first-mortgage interest to secure their deposit. There is nothing that is more secure than that. It is possible to have a widespread depression in credit markets, and people who invest in first mortgage - based securities will suffer a loss if the value of those securities decreases but they will never suffer a total loss. We are finding in some of the finance companies, though, that, if we have a second-ranked security, our security interest ranks behind the first debenture holder, and therefore we can be without any effective security and lose all of our money.

If we look at those two comparisons—the mortgage-backed security compared with the finance company investment—we would say that the mortgage-backed security is a lot less risky. Yet, because we have to have boundaries to a guarantee scheme like this, the mortgage-backed security gets no guarantee; it cannot avail itself of the guarantee provisions of this scheme, but the finance company can. We are causing a distortion in the market there; when we have had a run on mortgage-backed funds, and because people cannot avail themselves of the Government guarantee, they understandably say: “Well, I will put my money where I can get the Government guarantee; even though a first mortgage might be better than a finance company facility unsecured by guarantee, I will put my money with the finance company rather than with the mortgage-backed investment, which is not covered by the guarantee.”

I mention that in some detail because it shows the sorts of distortions that are unavoidable if we have a Crown guarantee such as this. It points to why we should be trying to get beyond these Crown guarantees and get out of the market eventually, because in my opinion we want to have a sound secondary market and not be reliant only on banks. There are a number of reasons why that is important. One reason relates to the fact that the major banks in New Zealand are all overseas-owned. So the profits they earn are generally repatriated overseas and are lost to our economy. Indeed, a large part of New Zealand’s current account deficit now is the invisibles—both the interest we pay on the overseas loan-lines that are re-lent by banks in New Zealand and also the profit margins they earn on those loan portfolios that are currently repatriated overseas. It is desirable that we have a set of regulatory affairs in New Zealand that enables our New Zealand - based financial institutions to grow. Those things ought to be competitive in the New Zealand market, and they ought not to have competitive disadvantage as a consequence of regulatory policy settings.

If we look at the fees to be charged to those who avail themselves of the retail deposit guarantee scheme, we see that different rates will be charged according to the different risk that is perceived. The risk is lowest for those that have the highest credit-rating. So if a finance company has a triple A rating, then the rate charged for the guarantee will be 15 basis points, or 0.15 percent per annum. But if a finance company has only a B rating, then the rate will be 1.5 percent, or 150 basis points. People might think that that makes sense for finance companies, but if they look at what is happening in respect of banks and building societies—