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 third time. We have had a reasonably wide-ranging debate on the bill, and that was always likely to be the case, despite the fact that the bill does not have a lot of the detail of the scheme in it. The Committee stage gave members the opportunity to work through most of the substantial issues that had been considered in bringing the policy together.

The Opposition, in the spirit of cooperation around this particular issue that we have followed for the last 12 months or so, raised a number of quite reasonable points. I will respond in a very general way. A lot of the points that members of the Opposition made had merit. The Government made judgments on issues to do with coverage, pricing, and product exclusions based on the principle that we want to move back to normal market conditions in a reasonable time. I thank members for the quality of that debate.

I will just remind the House of the general principles that are driving this bill. First, we want to ensure that depositor confidence promotes system-wide financial stability. One of the advantages the New Zealand economy has enjoyed over the last 12 months is that it has retained financial stability. In part that is to do with the fact that, although they were vulnerable, our Australian banks were in good shape when the financial crisis came along. That was partly because of actions taken by the previous Government in installing the guarantees to ensure that confidence in their stability was maintained, and partly because the wide range of tools that the Reserve Bank supplied to the financial system enabled it to get through the period of crisis into a period, now, of relative stability.

The second principle driving this legislation is the need to minimise economic distortions and ensure well-priced credit markets. There is no doubt that the guarantee does create some distortions, and an obvious one is the fact that deposits into our non-bank deposit taking sector actually grew or have grown during the time of the guarantee. I think anyone would say that in the absence of the guarantee that might not have happened. We need to reflect on the fact that one of the reasons for the financial crisis was mispriced credit risk. That is why it is important that in responding to the financial crisis we do not perpetuate for longer than necessary distortions in credit pricing. It is really important that we revert to normal market conditions, where people who are making deposits and making investments are facing a realistic trade-off of risk and return. That is another principle behind the bill.

The third principle is the need to do our best to ensure a viable non-bank sector in the future. A number of speakers through the Committee stage stressed a point that I think is important about how the four Australian banks dominate our financial intermediation. A large number of businesses and activities in New Zealand are not the natural customers of those banks, and therefore the non-bank sector is important. One of the principles is to ensure that the non-bank sector consolidates and rationalises itself in a way that means at the end of the guarantee we have places where people can go to borrow money for their ditch digger, truck, or other business need that a bank will not necessarily respond to. I would keep in mind, though, that because of that demand, it is likely that other players will come into the non-bank market.

Finally, we want to manage the Crown’s exposure in terms of fiscal costs. Any institution that fails under this guarantee imposes a cost on taxpayers, and taxpayers deserve their interest in these institutions to be looked after with due care. That has ruled out options such as unilaterally or quickly withdrawing the guarantee in a way that could put taxpayers in the position of paying out hundreds of millions of dollars to institutions that fail. Those are the same hundreds of millions of dollars that we need to run our health services, police force, and schools, so we are keen to ensure that the Crown and the taxpayer enjoy the potential benefits of an uplift in the economy, where asset prices stabilise, where confidence grows, and where there is a realistic opportunity that these guarantees will not be realised. I commend the bill to the House.

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

It will come as no surprise to the public if I reiterate that Labour will be supporting this bill. We do so because we believe, firstly, that it is appropriate for us to have framework legislation that provides powers to the Minister to bring down policy in this area, and to regularise what was necessarily done by emergency or reserve powers under the Public Finance Act after Parliament was prorogued just before the last election. The process we are going through is broadly appropriate; therefore, we support it.

It is right, as has been said by the Minister of Finance, who has just resumed his seat, that this has been a wide-ranging debate. It is right for two reasons. Firstly, as my colleague the Hon Lianne Dalziel has been at pains to point out, unfortunately there has been no select committee process, which I think is both unfortunate in itself and becoming a hallmark of this Government—that it considers that the standard safeguards of democracy are somehow pliable or dispensable.

We have a regret that in consultation on this bill we did not perhaps make even clearer our concern that there should be an opportunity to more formally question officials, and to give members of the sector and of the public the opportunity to raise their issues, because although the Reserve Bank and Treasury have been talking to the institutions, that is far from the public view. So I guess we go into this third reading debate with an enduring sense of having missed something important along the way.

I want to firstly recap briefly the Minister of Finance’s summary of the justification for the bill, because I think he has encapsulated quite well the rationale. In recalling from our first reading debate, the broad scheme of this was that there were three options. Having got the scheme in place, we could go cold turkey and let it expire at the end of next year, we could have a limited extension with limitations around risk and distortion—which is what the Government has chosen to do—or we could transition gradually to a permanent deposit guarantee scheme, which would have some enduring advantages for deposit holders. That is something we believe that the Government, rightly, still has in consideration. We commend that work, and we look forward to a good bipartisan discussion on it.

Within that the Minister has reiterated three rationales for taking the middle course. We think the middle course is the right course, but we have some questions about the nature of the rationale. The first one was system stability. Of course, system stability is important, and the Minister was kind enough to acknowledge that it was supported by the original retail and wholesale guarantee schemes that the then Labour Government put in place. I reiterate by acknowledging that it is also being supported by the strong presence of the very stable Australian banking system in New Zealand—and that is to be welcomed. It was not caught up in the derivatives-driven mess of Wall Street in the northern hemisphere, and it does provide some of the largest share of triple A rated banks in the world. We are fortunate that our system does not suffer from financial stability risk. Where we part company with the Government on this point, however, is that an acknowledgment of overall stability should not be an excuse to turn a blind eye to second-tier risks and longer-term issues that will be of strategic importance to this economy down the track. Our responsibility is to provide not only for stability today but also for sovereignty tomorrow. It is in those issues that we believe a level of concern is shared by many New Zealanders.

The minimisation of distortion is important and we agree that part of the seeds of the bursting of the global finance bubble was in the masking of risk, through other instruments than we are considering today—things like real estate - backed securities, collateralised debt obligations, and derivatives, which are a different story and not about this issue. But we agree that it is prudent to have some limitation around risk. The line has been drawn here at a credit rating of BB. We believe that there are arguments on both sides of the House. My colleague David Parker has been eloquent in setting out the pros and cons of that line and the fallout for members of the non-bank finance sector that by very issue of scale, as opposed to inherent portfolio risk, are either too small or cannot stand the transaction cost of getting rated.

The Minister responded that they have to anyway, for other reasons down the track. That does not change the fact that there will be fallout from that market, in addition to the fallout that has already occurred, and from that we will see a further concentration of that market. That is where we think the Government is on the weakest ground. We would like to have further discussion to help it out on this. The Minister said: “ensure a viable non-bank market”. That is where we believe most of the risk is here. At the end of the Committee stage debate we were coming on to the issue of concentration of risk, not only by type—95 percent, in major banks—but also concentration by source of funds, about 80 percent from Australia into our market, and by sector largely into real estate, largely fuelling the housing bubble.

There are some huge issues there for Parliament, the Government, and Opposition to work together on in the public good to, first, avoid a further housing bubble and collapse, and, second, to avoid us becoming pawns in somebody else’s banking game and to ensure that New Zealand has a diversity of sources of funds from many different lenders. We must do that so that we are insured against the marginal market problem—that is, when you are a very small borrower from a very big person and that person does not need you. Of course, the irony is that latterly we are starting to see the emergence of a different issue in that Australia is looking at New Zealand and saying: “Goodness me! You’re about, or coming up to, a third of our risk pool, and you might be riskier than some of our onshore assets. We’d like to take a closer look at your regulation.” Australia might ask the Australian Prudential Regulation Authority to oversee our financial system.

It is there that we come, whether we like it or not, to longer-term questions of sovereignty. Those are the issues that, in addition to the pass through of interest rates, the parliamentary banking inquiry uncovered in the last several weeks, and we believe, on our side of the House, that that was an extremely worthwhile exercise. We had 50-odd submissions, despite the work of the Beehive to shut the inquiry down—and I hate to be so harsh but there is no other way to put it. The Beehive tried to roll its own members to vote against the inquiry taking place, after the members had proposed a very worthwhile exercise in the Finance and Expenditure Committee. That was our first preference and where it should have happened.

I really want to thank the Green Party and the Progressive party for working very cooperatively in inviting all other parties in Parliament, but where was the Māori Party? It purports to represent people who have interests similar to Labour’s own people—the ordinary folk of New Zealand. We would have welcomed the Māori Party being there. Where was the ACT Party? It has clear views about financial regulation and speaks a lot of sense from time to time. It would have made a contribution. But oh no! The word went out from the Beehive: “Thou shalt not play.” And the word went out from the Beehive to the boardrooms of the banking sector, and they stayed away—some of them. Some of them, like Kiwibank in particular, and groups like Federated Farmers, the Manufacturers and Exporters Association, the Productive Economy Council—and even the Employers and Manufacturers Association (Northern), goodness me—had the courage of their convictions and said: “Whether you like it or not, these issues affect our members.” I commend them for coming along to the inquiry, and I am confident that with the further research that is going on, we will have a very substantive contribution to make to the ongoing debate.

In conclusion, and coming back to the substance of this bill, this is framework legislation. It provides the power for the Minister to bring down by regulation, through the Gazette, the policy that he has announced in the last couple of weeks—that is, to extend by 1 year the retail deposit guarantee scheme. In so doing we can understand that that is the middle option between three, and broadly we support both the process and the strategic option shown. But significant issues have arisen in this debate around the lack of consultation, the lack of public disclosure of issues, the concentration of risk, the fallout for the non-bank finance sector, the risks around the exclusion of collective investment vehicles, and, as the Opposition has been at pains to point out, the error, in our view, of allowing the major banks to opt out, when they represent 90 to 95 percent of the coverage, 90 to 95 percent of the revenue stream to the Government by way of premiums for this retail deposit scheme. The beneficiaries of the wholesale deposit scheme should be in the retail deposit scheme. That, in our view, was a strategic error. It will result in cherry-picking and it will result in a concentration of risk.

CRAIG FOSS (National—Tukituki) Link to this

I am glad the House is finally on the third reading of the very good Crown Retail Deposit Guarantee Scheme Bill. First of all, I acknowledge the support across the House for the bill, and the contributions of members, particularly those of the Hon Lianne Dalziel in the Committee stage. She talked about the regulatory impact statement and raised some very good questions in and around it. I acknowledge also some of the questions of some of her colleagues.

One point that kept being raised was why the bill was not referred to the Finance and Expenditure Committee. I note again that the original decision made by the previous administration to bring in the retail deposit guarantee in the first instance did not ever go before the select committee.

Hon DAVID PARKER (Labour) Link to this

Before addressing the bill it behoves me to respond to some of the comments made by the member who has just resumed his seat, the chairperson of the Finance and Expenditure Committee, National’s Craig Foss. I would have thought that that revisionist view of history was beneath him. It is plain that when the last Labour Government took office Government debt was 39 percent of GDP. When we left office it was 17 percent of GDP. Net debt was virtually nil—for the first time in New Zealand’s history, I understand. So, far from leaving the books in a poor state, we left them in a very good state. During the period of our tenure New Zealand’s growth rate was higher, on average, than that of Australia, the United States, Europe, and Japan. So on the growth front we did better, as well.

During the period of the Labour Government we built up savings to fund the future bulge in superannuation. We established what is colloquially called the Cullen fund—the New Zealand Superannuation Fund—which now has over $10 billion of savings in it to go towards superannuation in the future—contributions to which, of course, have been suspended by the current National Government, which is another example of its mismanagement of the economy.

Mr Foss’ contribution and criticism needs to also be reflected upon in the context of the fact that the Opposition is supporting this bill. I am afraid that Mr Foss, having served that up, will have to take a little bit back. The reality is that we expect judgment to be shown by the Government and judgment to be shown by the Minister of Finance. When he makes those sorts of accusations against us, I am afraid he will find it coming flying back, because the headline of today’s paper shows that his Government is a Government without ethics—“Fresh housing woes for English”. Mr English was trying to line his own pocket, and he showed terrible misjudgement in his personal dealings in respect of something that was going to privately profit him. So the member should not come here and lecture us about ethics when there is that sort of thing on the front page, with the Minister in charge of this bill.

I want to return to the topic, which is the financial stability that is ensured through this retail deposit guarantee scheme. Mr Foss misrepresented my colleague the Hon David Cunliffe’s comments about this being compulsory or voluntary. We have never suggested that it ought to be compulsory. The point he was making is that if an institution is going to pick up the wholesale guarantee, it should pick up the retail one as well. Otherwise we are saying that we need the guarantee for the big fellas who are lending to New Zealand from offshore hundreds of millions or billions of dollars, but ma and pa investors who are only investing $1,000 don’t get the benefit of the guarantee. That is the point the Hon David Cunliffe was making, and it should not be misrepresented by Government members.

Another own goal by Mr Foss was that he said the prior instrument was introduced without a select committee. Of course it was; Parliament was not sitting. Parliament had risen for the last election, so it could not go to a select committee. In response to that little faux pas, Craig Foss said, off the cuff: “Oh, well, of course, it could have gone to a select committee straight after the election.” He is right, but National was the Government by then, so how that was the Labour Party’s fault, I am not quite sure. I think that is 3 nil so far to the Labour Party; they were all own goals by Craig Foss.

I return to one of the other issues that my colleague the Hon David Cunliffe touched upon, because it is a concern both he and I share. It relates to overall financial stability and the size of our financial institutions. I want to place on record, as the Hon David Cunliffe did, that we are fortunate to have a stable banking sector, in no small part because of the strong major Australian banks. I am not criticising them as entities, but their interests do not necessarily always coincide with New Zealand’s interests. I am concerned that the fee structure and the limits to the ambit of the scheme are set out in a way which, again, prefers the big end of town. The major banks have a lower fee structure because, by virtue of their size and the scale of their businesses, they are more likely to get a high credit rating than a smaller financial institution. One of New Zealand’s problems is the concentration of our finance sector in four main banking institutions. That is a long-term problem for New Zealand in terms of both the effect it has on New Zealand credit markets and the effect it has on our current account deficit through the repatriation of profits of those banks, the combined profit of which is bigger—and correct me if I am wrong, Mr Cunliffe—than the total profit of the rest of the New Zealand stock exchange put together. That is an enormous issue. The profits, in total, of the four big banks are more than the whole of the New Zealand stock exchange. Further cementing the advantages that those main banks have over smaller New Zealand competitors is not good policy, because it further entrenches that advantage and will see them grow their market share further. That is one of the distortions that is extended by this guarantee scheme.

We support the scheme because we do not see that there is presently a better option. We concede that we need a retail guarantee scheme, and we think it should be compulsory for those who have bought into the wholesale scheme, but otherwise it should be voluntary. But we think that the fee structure is in some ways wrong, in that a large Australian institution gets a lower fee structure than a New Zealand building society, despite the fact that the risk profile of a New Zealand building society is quite low. I think that that is a problem.

I am quite attracted to some of the writings of Hyman Minsky, an American economist who died about 10 years ago. He predicted some of the difficulties we have seen in financial markets around the world. There were two main parts to his theory. The first was that the longer the period of financial stability, the more risk taking we see on the part of financial enterprises. That is true. They forget the last cleanout, they chase a higher market share, and they want to justify the huge bonuses the chief executives get, so they embark upon more and more risky transactions. They try and get around existing regulations by doing transactions that are off-balance-sheet in terms of the regulator. He said that that means there would be a constant update of regulatory oversight, and he was right. That is one of the problems we have seen internationally. It allowed a lot of those large financial institutions to engage in transactions that were outside the regulatory package that related to their equity requirements, and therefore they were able to embark upon very risky transactions while pretending that they were low-risk institutions.

The second part of Hyman Minsky’s theory, which I think is also sound, is that financial enterprises ought to be of a size that reflects the size of the actors in the economy. He said that we ought not to be reliant on one, two, three, four, or five large institutions to an undue extent; we ought to have a healthy, competitive array of financial institutions, and they need to be in the bank and the non-bank sector. One problem this guarantee scheme causes is that some of the non-bank scheme is hampered. One of the reasons this ought to, in my view, have had a little bit more scrutiny is that, although the regulatory impact statement says that one of the problems has been to encourage more risk-taking investment—because it has encouraged people to think that investing in finance companies is low risk because of the presence of the Government guarantee—we have not had information as to what the deleterious effect has been on other parts of the non-bank sector. I know that many hundreds of millions of dollars—if not billions; I do not have the information and I cannot get it because there is no select committee process—worth of funds have fled from other parts of the non-bank sector that are not covered by the guarantee scheme. Rather than encouraging the spread of financial institutions and the growth of a range of financial institutions, including in the non-bank sector, the guarantee scheme has the effect of concentrating the size and the market advantage of our existing major participants, and that is not good.

I think that is a real issue for New Zealand for the future. It is an issue not just related to the current account deficit, but also to the control of the economy, economic sovereignty, and the proper functioning and efficiency of credit markets. We need more smaller institutions. Having said that, the Labour Party supports this legislation as being necessary.

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

I stand to speak on the Crown Retail Deposit Guarantee Scheme Bill. The Green Party will be supporting this bill. We think that it is essential to maintain long-term stability in the financial sector.

The only reason we are here today is because of the global financial crisis. The only reason we have to deal with this bill is because the “masters of the universe”, as they like to call themselves, just collapsed the global economy. The reason taxpayers have to underwrite the banking sector, both in wholesale and retail, and the reason taxpayers have to underwrite the global financial system is that the people who were running it collapsed it through mismanagement, poor management, and genuine greed. They collapsed the global financial system and, hence, collapsed the global economy.

In New Zealand we have a particular problem. Our problem is not the same as the problems that are found elsewhere in the world. Fundamentally, our problems revolve around the distortions that are present in the tax system and in the economic system that encourage investment in property rather than in the productive sector. That is the fundamental problem we have; it is quite different to some of the problems elsewhere in the world. New Zealand has a very specific problem.

Some of the evidence we received during the bank inquiry underlined that problem. I want to point to a few statistics around it. Over the last 9 months—during 2009—the banks have loaned another $3 billion into the housing market, which takes it up to around $165 billion. At the same time, lending by banks to businesses slumped by about $3 billion. Over the last 9 months of this year, lending into the housing market increased by $3 billion while lending to businesses decreased by $3 billion. To me, this epitomises the problem that we have. We have a banking system that is accustomed to and is entirely comfortable with loaning into the housing market. It is what it does well. But we do not have a banking and financial sector that is good at supporting New Zealand businesses. It is not as easy to loan to a productive enterprise working in the tradable sector as it is to loan on housing. The banks do not do it. In fact, over the course of the last 9 months of this year they have taken $3 billion out of New Zealand businesses and loaned another $3 billion into the housing sector.

The incentives around the financial system are wrong: we are incentivising investment into the non-productive part of our economy. The cost of that is enormous. The social cost is enormous. Housing is tremendously expensive in our country, and it is now very difficult for people to get into the housing market. Housing consumes a vast amount of people’s income: they have to pay their mortgages and their rent. We have set up incentives that are not good for the New Zealand tradable sector or the New Zealand productive sector, and that, at the same time, inflate the housing market.

If we look at what those incentives are, we see that the incentives around the tax system, in particular, encourage investment in property. The reason is that by investing in property one can offset the losses on those investment properties against one’s taxable income. One of the most commonly used mechanisms to do that is the loss attributing qualifying company. Losses on loss attributing qualifying companies increased from $750 million in 2003 to $2.3 billion in 2008. We have set up a system that is encouraging people to invest in investment properties, and use the losses on those investment properties, quite lawfully, to effectively offset their income tax, so the taxpayer ends up picking up the tab. People are doing it and banks are loaning into the housing market. We have a tax system that encourages the banks to loan money to people so that they can buy investment properties. They can then offset the losses on those investment properties against their tax. We have established a stupid incentive scheme. It is bad for the New Zealand productive sector. It is bad for the New Zealand tradable sector. In the long run, it is extremely dangerous to the New Zealand financial system to lock up billions and billions of dollars into an overinflated housing market. We have set up a bad system.

If we want in the long run to guarantee the stability of the financial sector, which this bill is ostensibly designed to do, and if we are serious about doing that, we need to address those underlying incentives. The Greens have been criticised because we want to change the tax incentives around housing and investment property, but I ask what the alternatives are. We currently have a series of incentives that encourage speculation in housing. We should change those incentives. We know what is involved. We know that we can introduce a capital gains tax, excluding the family home. We know that we can ring-fence the losses on investment properties. These policy measures are available to the Government if it has the courage to do what is in the long-term interests of New Zealand—what the Government knows is in the long-term interests of New Zealand. It is worried about short-term political risk because it has a short-term approach, I guess. But one has to look at the long-term interests of the New Zealand economy. We cannot continue to throw all of our money into housing while businesses are starved of the money they need to make investments to support productive enterprise in our country.

The tradable sector is under pressure constantly because the Reserve Bank tries to control inflation by increasing interest rates. The Reserve Bank should be cutting the official cash rate tomorrow. One of the concerns of the Reserve Bank—and why it may not cut the official cash rate—is what will happen to the housing market. If interest rates are low, then the housing market will start to bubble again, and it knows that is a problem for inflation. Why do we not have additional tools to target the housing market so the Reserve Bank can cut the official cash rate, make capital available to businesses, and, at the same time, target the asset bubble in housing so that more inflation does not come out of the housing market?

We can adopt those tools; this Parliament can adopt those tools. It would be good for New Zealand businesses. It would be good for New Zealand households in the long run to have stable housing prices. We just have to have the courage to say to people that we know they have made legal investments in investment properties, and we totally understand why they did it, but the long-term interests of our country means we have to make the decision to ring-fence those losses and move away from that system we set up. It is in our children’s interests, so that they can have affordable housing. It is in the interests of our children as well, so that they do not inherit a massive overseas debt that is being used to fund speculation in the housing market. We are handing over to the next generation a net international investment position of negative 100 percent of GDP. That is what we are passing on to the next generation. We have the choice to change direction. We have dramatically increased the level of overseas debt in order to fund housing speculation. We have housing speculation because of the tax rules. We can change the tax rules. It is within the power of this Parliament to act in the long-term interests of the New Zealand economy and the New Zealand people and change the rules.

I call particularly on Government members to embrace their responsibility. Over the course of however long their term of Government is, they will never be in a more popular, stronger position than they are now. We can all read the polls. The Government is in a very popular, strong position. Government members should use that popularity and strength to do what they know is the right thing for the New Zealand economy. Even though they know some political risk is associated with it, in the long run they know it is the right thing to do. We all know it is the right thing to do. We cannot continue to borrow to pay the interest on previous borrowings. That is the route to destitution. A country that continues to borrow to pay the interest on previous borrowings is destined to have an economic crisis. We all know that. The Minister of Finance says it every day. We have the opportunity in this House to make the changes that we all know need to be made. I call on the Government to do the responsible thing and make the changes.

Touching very briefly on affecting reserve ratios, it is true, as Mr Foss says, that in some ways it is an old-fashioned idea, but we have a specific problem. We need to look at reserve ratios, particularly loaning into the housing market. If it is a way to try to constrain the flood of foreign capital that is being channelled by the banks into the housing market, I think we should consider it. We have a major problem. We should not put things off the table just because they have been done before, and are associated with a former National Prime Minister. We should consider all options, because we now have a major problem. In order to protect our sovereignty, housing affordability for future New Zealanders, and the productive sector of the New Zealand economy we need to look at all of these measures in order to control that housing asset inflation so that we can get on and assist the tradable and productive sectors. This bill is part of that, and we will support it, but we need to go beyond the bill.

JOHN BOSCAWEN (ACT) Link to this

I start by addressing some of the issues raised by the Opposition about the Crown Retail Deposit Guarantee Scheme Bill. Opposition members talked about the growth in the finance company sector as a result of the guarantee that was introduced last year. They said deposits into the finance company sector had been declining, but, following the introduction of the Government guarantee last year, those deposits had taken a turn and were now going upwards.

The first point is that we need to acknowledge that it is good to have a very strong secondary market beyond the banks in the non-banking sector, and, to use the words of the Minister of Finance, to have someone to fund the diggers and the trucks. I ask Opposition members why they would not expect deposits to grow. Of course we would expect them to grow. Since the guarantee was put in place 12 months ago, for a 2-year term, anyone lending to a finance company was basically lending to the Government. People were lending to the Government for a period of up to 2 years; as long as their deposit did not go beyond, I think, 14 October 2010, they were lending to the Government.

The guarantee that was put in place did not actually cost most finance companies anything, because the guarantee was priced on a figure that was based on a margin over a company’s loan book at the date, plus a 15 percent margin. If a finance company owed its depositors and equity holders $100 million and had invested $100 million, it was able to get the benefit of a Government guarantee for free, as long as its loan book did not exceed $115 million—so, the base loan at the date the guarantee was introduced, plus a 15 percent margin.

I thought that the Hon Lianne Dalziel gave a very interesting commentary on this bill, and I accept her concern that it was introduced at a very late stage. The Labour Opposition has a genuine reason for expressing disappointment that it was not given copies of the bill earlier. But Lianne Dalziel talked about privatising the gains and socialising the losses. It was the guarantee put in place by the previous Labour Government that privatised the gains and socialised the losses, because although there was a need for a guarantee and although it was put in place because of international circumstances, it could have been priced entirely differently from how it has been. It would have been quite possible to put a pricing structure in place that had the finance companies paying for the benefit of what they got. In essence, the previous Labour Government gave a free gift to the owners of those finance companies. It was the Labour Government that ensured the gains were privatised.

I say that because within a day of the guarantee being put in place on that Sunday, on the Monday, I had emails inviting me to invest in various institutions. I was told the investments would meet the requirements of the Government guarantee, and I could invest in a particular institution and earn an interest rate of 7, 8, or 9 percent—and many people did. The finance companies were flooded with money, and that is why we had a growth in deposits. Those companies would have moved to drop their interest rates had they needed to pay the full price of the Government guarantee. So of course there were distortions, and those distortions were generated because of the structure that was put in place.

AMY ADAMS (National—Selwyn) Link to this

It is a great pleasure to take a call in the third reading debate on the Crown Retail Deposit Guarantee Scheme Bill. I have sat in this House and listened to the entire debate on this bill. It has been very interesting, and there have been some very worthwhile contributions from all sides of the House. It certainly is good to see support from across the House on this bill.

Obviously, in effect we are continuing the scheme that was put in place by the previous Labour Government in October last year while Parliament was dissolved for the election period. At that time the scheme put in place was to expire in October next year, but it is now very apparent that a longer-term transition is needed, so now we see primary legislation before the House to put in place a new scheme. But the reality is that it is very much akin to continuing the existing position, whereby retail deposits and bank and non-bank lenders can be guaranteed by the Crown.

In the debate there has been a very wide range of contributions, and some very big-picture analysis of the economy, risk, the banking sector, what went wrong, who is to blame, and where we should go from here. All these things have their place, but I am taking a short call to go back to the fundamental operation of the bill. Really it is about investor confidence and the stability of our sector. I think it is worth reiterating the point that my friend Mr Foss made so well in his speech when he said the bill is not about guaranteeing the banks or ensuring that they do not lose money. It is about ensuring mum and dad investors, those people who have put money into the banks, can have confidence that their money will be there when they come to get it.

That confidence is important. It is important not only to look after the hard-earned money they have worked hard to save, but also to ensure that liquidity stays in our system, because those same deposits are then turned around and lent out to businesses and homeowners. Dr Norman talked about the difficulty for businesses in borrowing money. I am sure that is right, particularly at the moment. But if we do not have deposits, the banks will not lend. It is a pretty simple equation. That is why this system is so important.

In this bill we have a system that ensures that any or all debt securities, as defined in the Securities Act, in an eligible entity can be guaranteed by the Crown. But—and it is an important “but”—that is only if the Minister believes it is necessary or expedient in the public interest to do so. I make that point, and I made it during an earlier contribution, because, even if the eligibility criteria are met, it is still up to the Minister’s discretion to determine whether granting any particular guarantee is in the public interest. That is the overriding test here. It is not about what the institutions want and not about whether they want to be able to put it on their website; it is about whether it is in the public interest for that particular entity to be guaranteed and for those particular debt securities to be guaranteed.

We have a system that has a number of safeguards in place. It really makes it clear that the principle consideration in this entire system is the public interest. As I said, the public interest is about protecting the funds of the mum and dad investors, but also about the stability of our system. That stability has been more important in the last 12 months than ever before. If ever we have had to wonder about the stability of our banking system, now we know, first, that we have a fairly good system compared with the rest of the world, and, second, that that is crucial. It is crucial to New Zealand’s ability to weather the worst of the storm and to come out of it, I will not say “untouched”, because certainly a lot of people have been hurt terribly in this recession, but in a considerably better position than we might otherwise have been. The bill is a good bill. I commend it to the House.

Hon CLAYTON COSGROVE (Labour—Waimakariri) Link to this

I, like a previous speaker, Amy Adams, have spent a fair amount of time listening to the debate on the Crown Retail Deposit Guarantee Scheme Bill. It is correct to say that the Opposition is supporting the bill. The previous Labour Government brought in the initial guarantee scheme in October 2008. High priority has to be given to the security of investments and to the stability of financial institutions within an economy. That is a bedrock principle. The Opposition, though, in supporting the legislation, has raised a number of questions. If we look at the history of the initial guarantee scheme, which the previous speaker said rightly was put in place on the eve of the last election, we see that the overseas funding—the wholesale area of banking—was provided with a guarantee. Without legislation or regulation, the then Labour Government negotiated with the banks to ensure that those guarantees extended to the retail sector and to mum and dad Kiwis. There is always a lot of criticism over regulation and legislation. Ironically, this was an instance where negotiation occurred in extremely turbulent and volatile times and on the eve of an election. The banks, after discussion and agreement, actively participated in that retail space, and mum and dad investors had their deposits guaranteed.

The argument that we make here is about the question of what would have happened if the banks had not agreed to participate in that retail space. Who knows? I suspect, as we have said in this debate, that it would have been unacceptable—and it should be unacceptable today—that banks are given a cast-iron Government guarantee without the Government requiring a reasonable price. By that I mean that banks participate in the retail end of the market. The Government has guaranteed, quite properly, for overseas interests and overseas financial markets that provide equity and funding to our banking institutions that if the bank goes belly up, then those international funds are guaranteed. Why is that? As I have said, those guarantees are necessary in times such as we live in now to ensure that the money—if you like, the lifeblood—flows through the veins of the financial institutions in respect of liquidity.

What is missing, therefore, is a price for that Government commitment. I disagree with Mr Gilmore when he says this scheme will not benefit the shareholders of the banks. For goodness’ sake, as a man who purports to be the resident genius of this Parliament in the commercial and in every other non-academic and academic area, does he not realise—[Interruption] Suddenly the National members are awake. Does Mr Gilmore not realise that any time a Government—

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

I acknowledge the earlier speakers who have contributed to this debate. A number of issues have been raised and a number of questions have been asked. I acknowledge those who have made a contribution.

Rather than talking about the wider issues of the financial industry, we are talking today about the Crown Retail Deposit Guarantee Scheme Bill. As many members stated earlier, the scheme was put together last October with a degree of haste by the previous Government in its waning days. It was one of its last acts—

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

I want to express some concern about the quality of the debate, and I do so reluctantly, having listened to the contribution from Peseta Sam Lotu-Iiga, the honourable member and councillor, who has just resumed his seat. The reason I am a little concerned about the quality of the debate is the way that this Crown Retail Deposit Guarantee Scheme Bill is being dealt with. It is being dealt with under urgency, and I believe that bills such as this one should not be dealt with as a matter of course under urgency. There is a serious issue about legislation not having the quality of scrutiny that the public would expect in the circumstances. As my colleagues have said repeatedly, the Opposition is not in opposition to the bill as a matter of principle. The underlying desire to ensure financial stability at this time is obviously a desire that we support. But Treasury officials recommended that referring the bill to a select committee for 1 to 2 days would not be a problem, and they said that it would enhance what they considered to be a flaw in their consultation process because they were not able to have the degree of consultation that they would expect.

I will say why referring the bill to a select committee for 1 or 2 days would not have made any difference. One reason is that it would not have held the bill up for a time of any great moment, and we still would have had the legislation in place 1 year before the expiry of the current guarantee scheme. We could have still met the timetable that the Government has set for the implementation of this legislation, so it was not an argument about the amount of time the bill would have spent before a select committee. Nobody on this side of the House suggested that it should go there for the normal 6 months.

The advantage of sending it to a select committee is that members of the committee get to test assumptions. All of the decisions that the Government is making in this respect are based on assumptions that have been proposed by officials from both the Reserve Bank and Treasury, and it would be really helpful to the Opposition for us to be able to test those assumptions, to push back on some of them, and to have some serious debate about these serious financial issues.

The second reason is that we can work through the analysis that lies behind the advice. How are our assumptions formed? They are based on analysis that has been undertaken. I have some issues with some of the analysis that we have been presented with in the regulatory impact statement, but I will come to those in a minute.

The third reason why select committee processes are important, even if they are truncated, is that we can get answers about the balance between what the regulatory impact statement itself says was a line call between the status quo and the extension of the scheme, especially when the banks do not favour the extension according to the regulatory impact statement. These are serious matters, and they are reasons why, with a short period of reference to a select committee, we could have dealt with this bill through its remaining stages next week, also under urgency, and there would have been less opposition from the Opposition to the process. As I say, we are generally on board with the underlying principles.

This brings me to the regulatory impact statement. I do not recall seeing such an extensive regulatory impact statement. Of course, those who know me will know that I tend to bang on about the quality of regulatory impact statements. Since we have had a Minister for Regulatory Reform the quality has actually gone down, but this regulatory impact statement stands out. It is the best regulatory impact statement I have ever seen, but it is not written in the bill. It is not included in the bill. All they did was put the executive summary in the bill and then publish the regulatory impact statement on the Treasury website. So, of course, I downloaded that over the dinner break yesterday—

AARON GILMORE (National) Link to this

That was Lianne Dalziel, the previous Minister of Commerce in the Labour Government that oversaw a large number of finance companies lose, I think, about a billion dollars during the time of her reign. But I think I heard more validity and understanding of the finance sector regulations in that last speech than I did in her speeches in her entire time as Minister of Commerce. Some very good points were raised by the previous Minister of Commerce in that last speech.

I will raise a couple of issues, including why this legislation is going through under urgency. It is pretty simple: the financial sector is unbelievably sensitive to information about changing a regulation. The financial sector is one where people have a good understanding of what goes on, and when we look at what has occurred we see that even Treasury—in its great regulatory impact statement that Lianne Dalziel, the member over there, was speaking about—talked about the need for urgency for this legislation. The finance sector needs certainty and surety in relation to this legislation being passed. Even the regulatory impact statement goes into some detail about the need for urgency. The previous scheme, which this scheme is replacing, was implemented urgently without any select committee process. Giving a number of days for a select committee process would only drag this legislative process out and remove the certainty the finance sector needs for such legislation.

I will touch a little on credit ratings. There have been a number of statements about credit ratings, and a bit of misunderstanding about what a credit rating is: what is in, what is out, and how people get one. I suffered here from statements from a member on the other side of the House who criticised my understanding of credit ratings. I will say two things. The first is that on 1 March 2010 all non-bank deposit lenders with assets of over $20 million will be required to have a credit rating—all of them. That is existing law. Secondly, the reality is that, yes, for about $100,000 anybody can get a credit rating. Apart from that, people do not know what credit rating they might get until they go through a process.

STUART NASH (Labour) Link to this

I rise to support the Crown Retail Deposit Guarantee Scheme Bill in its third reading. I appears that there will be two things that will expire in October 2011—the Crown retail deposit guarantee scheme, and, by the look of things, the National Government. Bring that on! As has been previously alluded to, the Crown retail deposit guarantee scheme was urgently put into place by the Labour Government for a number of social and financial reasons. The main financial reason, however, was to create a level of global confidence in the New Zealand banking sector through the provision of Crown guarantees, thereby allowing the level of liquidity required to allow New Zealand - domiciled banks to operate. Put more simply, the scheme allowed our banks to continue to borrow money when there was a risk that they could not. That risk was not good. Australia had instigated a similar scheme just the day before, I believe, and if New Zealand - domiciled banks were to be able to gain access to a very tight pool of global funds, the scheme was imperative.

Members will remember at the time—a year ago—global financial institutions and household names like Lehman Brothers, Bear Stearns, Bank of America, Fannie Mae and Freddie Mac had either failed or were in the process of failing. They were huge institutions with enough leverage to cause the type of credit crunch that the world was beginning to experience. At this point we were not sure what depositors in New Zealand would do. Would they do what they had previously done to the finance companies—namely, start a run on deposits caused by a crisis of confidence leading to a sector-wide collapse and near extinction? The scheme came into effect on 13 October 2008 and was to last for 2 years. Hence the reason we are in this House today debating the passage of this bill.

As I mentioned, and many of the Labour speakers have mentioned it, I have some concerns over the urgency nature of this bill, because I believe it favours the rule of money over the right of the people to have their say through the select committee process, which is a fundamental principle of our democracy. Of course, the dire and urgent circumstances under which the first Crown retail deposit guarantee scheme was implemented are markedly different from the state of the current global financial sector today. The reason the original scheme did not have its own legislation is simply that the House had been dissolved in the countdown to the general election, and, therefore, technically there was no ability to take this through the legislative route, but, most important, in October 2008 the world’s financial system was in meltdown, and decisive action was required. That is why it was done in 24 hours and implementation was immediate.

The times have changed. If nothing else, we now know the state of the global economic situation and this knowledge has allowed Governments around the world to put in place packages that have alleviated the worst of the effects of the global meltdown. That knowledge has allowed prudent banks, including those operating in the New Zealand market, to rethink their fundamental philosophies around the pricing of risk and the management of growth. That has allowed them to develop strategies that are in line with the state of the market as we now know it. Actually, we are now at the point where the large banks are currently analysing the cost versus the benefit of their participation in the retail deposit guarantee scheme. There is a price for participation. For example, a bank with $20 billion in retail deposits would pay around $15 million in fees per annum. That is more than the Government has cut from adult and community education in the Budget, which means that, for example, in Napier no high school will be running night classes in 2010. So the 6,000 students who took those classes in Hawke’s Bay will not have the opportunity to upskill, socialise, or improve themselves personally or professionally. Our people in our communities are the worse for it. But that is another story.

The reason that I bring up the change in circumstances is that this bill need not have been forced through under urgency. It could have had a very tight reporting-back time. As a member of the Finance and Expenditure Committee, assuming that the bill had come to that committee, I would have been most interested in hearing submissions from all affected parties, especially submissions for the major banks—except that the major banks are averse to presenting submissions. That is the irony of this bill. The major Australian banks have done very well out of this scheme, as have the New Zealand economy and New Zealand depositors. Do not get me wrong; I understand the value to the New Zealand economy of the big Australian banks. But the irony of this bill is that the banks have taken advantage of the scheme, but they have refused to appear before a banking inquiry to alleviate the fears and dispel the rumours about the current state of the banking industry and the way they are treating ordinary Kiwis in terms of the amount they are charging on short-term floating mortgage rates. I spoke to one of the bigwigs of one of these large banks and asked him why he did not just come along to the inquiry just to show and prove to Kiwis that in fact the banks are not ripping off ordinary New Zealanders, to dispel that rumour and dispel that perception. He said: “Cobber, you are probably right.”, but it did not change the bank’s stance.

Anyway, as I was saying, the true urgency has actually now disappeared from this scheme. It has another 13 months to run in its current form, and, therefore, there is enough time to follow the proper course for passing legislation. The Minister of Finance told us yesterday that he made a call due to the need for certainty. I accept the fact that financial markets operate optimally in an environment of certainty, but I would contend that we could still have afforded certainty 13 months out. I also ask, if this bill was important enough to rush through under urgency, why it was not on the Order Paper 6 months ago when we were debating the secondhand-car dealer bill or other legislation that, although important, perhaps did not have the same national interest as this Crown retail deposit guarantee scheme does. After all, this bill will protect over $120 billion in deposits currently held by the banking and non-banking sector. Did Gerry forget to put it on the Order Paper?

That Minister of Finance, coincidentally, was also the Minister of Finance during the last crisis of the 20th century. Most economic commentators and historians have concluded that he handled that crisis pretty badly. Coincidentally, he is still trying to implement 20th century stimulus packages, when the rest of the world has left Friedman behind and started limiting economic measures to those targeted at people who need them—those on low and middle incomes—instead of a third of all tax cuts going to the top 3 percent of wage and salary earners. Do members know that if a person earns under $40,000 that person receives nothing from the Government tax cuts? In Hawke’s Bay that is around 75 percent of the population who receive not a penny in tax cuts from Mr English and the National Government. Anyway, I digress.