2. CRAIG FOSS (National—Tukituki) Link to this
to the Minister of Finance
What steps has the Government taken to ensure the stability of the financial system?
Hon BILL ENGLISH (Minister of Finance) Link to this
In October last year the New Zealand Government guaranteed retail deposits of New Zealand financial institutions. Over 80 institutions accepted that offer. In total, over $120 billion of deposits from around 3.5 million depositors are covered by the guarantee. The guarantees are due to terminate on 12 October 2010. Today the Government has announced that it will be offering a revised retail guarantee scheme that will extend to 31 December 2011.
Financial conditions have stabilised since last October, and, accordingly, the need for support is now less extensive. The significant changes from the existing guarantee scheme will include the following: fees paid by institutions will be graduated to reflect their risk and will apply to all funds guaranteed; the limit on eligible funds guaranteed will reduce to $500,000 per depositor for banks and $250,000 for all other institutions; deposit-taking institutions will require a minimum credit rating of BB or higher to participate; and collective investment schemes will not be eligible to participate. All depositors currently benefiting from a Crown guarantee will continue to have their deposits covered until 12 October 2010. Whether they are covered beyond that date will depend on whether their institution joins the revised scheme.
Hon Jim AndertonIs the Minister satisfied that every company receiving a Crown guarantee meets the published policy guideline requirement that the individuals controlling it have the relevant business experience and the track record of meeting payments as they fall due and of maintaining solvency?
Under the existing guarantee, the Crown has the power to appoint inspectors where the Crown believes that institutions are not meeting all the requirements of the guarantee. I point out that the non-bank institutions covered by the current guarantee will, in the next 6 months or so, have to meet the requirements of the non-bank regime that were put in place by the previous Government. That will require all those institutions to acquire a credit rating and meet capital requirements. They need to get on and organise their affairs appropriately.
The Government wants to strike a balance between ensuring financial stability, reducing the distortions to market conditions, and reducing the risks to the taxpayers, who have so far paid out around $68 million under the guarantee. Today’s announcement provides certainty and means that over the next 2½ years depositors and institutions can make an orderly transition from the guarantee back to normal market conditions. The scheme will be legislated to cease at 31 December 2011.
Can the Minister tell the House what it is about FAI Finance—wholly owned by the Hanover Group—that gives him confidence that the entity controlling that company has maintained solvency and displayed financial acumen; or is a 5 year, billion-dollar, so-called debt restructuring plan in order to avoid bankruptcy a good example of financial acumen?
Mr SPEAKERIn inviting the Minister to answer that question, I am not a 100 percent sure about the Minister’s responsibility for the particular financial institution. But insofar as it relates to the guarantee, I am sure the Minister can answer.
I will not be commenting on individual institutions, simply because the task of supervising the institutions is delegated to the New Zealand Treasury. Any institutions who are covered by the guarantee need to focus on getting their affairs sorted out—firstly, to meet the requirements of the non-bank regime, which will be introduced over the next 6 months, and, secondly, to prepare for a transition to the extended guarantee. Then they will need to prepare for a time past 2011 when there will be no guarantee. Some of those institutions may find that a challenge, but the intention of the guarantee is to protect the depositors on the way through.
Hon David Cunliffe Link to this
Does the Minister expect the major banks to participate in the extended retail scheme; if not, given the ongoing benefits to the banks flowing from the wholesale scheme, has he indicated his wish to see official cash rate cuts fully passed through into short-term interest rates?
We have not drawn any particular connection between the official cash rate and whether the banks take up, because both those decisions are made by other people. The official cash rate is set by the Reserve Bank, and the banks themselves will make their own decisions as to whether to take up this guarantee. My understanding on the wholesale guarantee is that there are indications in the financial markets that they would be willing to lend to non-guarantee issues by the banks, and that is a sign of progress towards stability.
Hon David Cunliffe Link to this
Why has the Government failed to take any steps to help reduce interest rates, which was identified as a key concern for small businesses in a business confidence survey from Research New Zealand—the same survey that said that 99 percent of small businesses thought that the Job Summit was a waste of time?
In this context their overriding consideration has been to ensure that credit markets do not freeze up. I believe that the action taken by the previous Government in issuing these guarantees was an important part of that. The measures the Government has taken to help reduce interest rates have been primarily around restraining its own spending and its own debt requirements. The rationale for that was all laid out in the Budget.