Free content by Fresh Content.net

Tuesday, October 14

Govt steps in to protect savings

The Government is introducing a $150 billion bank deposit guarantee scheme, but says it has total confidence in New Zealand's banking sector.

The opt-in scheme, which was announced on Sunday along with a similar move in Australia, aims to ensure continued confidence among depositors amid a freeze on international credit that is chilling the world economy.

Helen Clark has also said a Labour government would present a mini-budget in December to deal with the effects of the international financial crisis.

"It's obviously affected the kind of policies we are going into the election with," she says.

"We're not looking to cut overall government spending but we have to look very carefully where we direct it."

Clark says the government is assuming the international crisis will have a prolonged effect on economic growth.

Australia's prime minister Kevin Rudd is describing the global financial crisis as "a national security crisis".

Analysts say there is now little doubt that growth in Australia will slow sharply next year with the possibility of recession very real.

The International Monetary Fund has warned of a meltdown in the global financial system, and many other countries have already moved to protect their banks.

Michael Cullen, who is using his powers under the Public Finance Act to introduce the opt-in scheme, says he does not believe the taxpayer is at risk.

The scheme, initially for a two-year term, will cover all retail deposits of participating New Zealand-registered banks, and retail deposits by locals in non-bank deposit-taking entities such as building societies and credit unions.

The scheme will be free for institutions with total retail deposits under $5 billion.

A fee of 10 basis points per annum will be charged on total deposits above $5 billion. This means that a bank with $20 billion in retail deposits would pay $15 million in fees per annum.

Australia's move to offer an even broader guarantee would have left New Zealand as one of the few countries in the world without such a policy in place.

"The deposit guarantee is designed to give assurance to New Zealand depositors. The New Zealand banking system remains sound. We want to ensure that ordinary New Zealanders feel that their deposits are safe in the current uncertain international financial market conditions," Cullen says.

The guarantee was offered because Cullen says he would not be comfortable with New Zealand being the only country not offering such a policy.

The contingent liability would go down in the books at $150 billion: "Not one I expect to be called upon because the institutions are extremely sound," Cullen says.

Most of the banking sector cash assets are made up of wholesale banking deposits.

KPMG deputy chairman Godfrey Boyce says the move is consistent with what is happening overseas, but it is a significant change to the established thinking in New Zealand.

"It's definitely a ground shift move, but it reflects the extraordinary times we're in I guess," he says.

The decision was somewhat inevitable with every western country seeking to look after its own deposit base.

"You start to look as though you're out to one side just by the mere fact you don't act and move with everyone else. I think there was peer pressure," Boyce says.

In New Zealand, finance sector woes have centred on property-related finance companies and funds, and retail investors have not really been affected.

Boyce says he believes bigger banks will raise questions about how different-sized banks are treated under the scheme.

"Basically you don't pay anything if you've got a retail pocket base of $5 billion or less, and then if you're ANZ, BNZ, Westpac or ASB you pay essentially a guaranteed fee over $5 billion," Boyce says.

"It seems a little bit of an inequity sitting in there somewhere, which I think the big four will reflect on."

National Leader John Key yesterday welcomed the move.

He called it an "inevitable and sensible step" considering international moves. However, he agreed that New Zealand's banking system continued to be sound.-tvnz/nzpa

0 comments: