Deposit guarantee scheme extended

Tuesday 25th August 2009

The government is extending its Retail Deposit Guarantee Scheme by a further 14 months to December 2011, hoping that the world economy will have recovered enough by then for finance companies, in particular, to get back on an even keel.

The scheme has been a lifeline for the troubled finance company sector, although the scheme has meant depositors are wary of lending beyond the life of the scheme, which was to expire on October 31 next year.

Today's announcements extend that to December 31, 2011, and the government has no intention of extending beyond that, Finance Minister Bill English said at a press conference announcing the new cut-off date and higher fees for participants.

The extended guarantee scheme will also put the acid on the least creditworthy finance companies in the scheme to get credit ratings, recapitalise, or exit the industry. The revised scheme will impose a sliding scale of fees, which will rise sharply for the weakest rated entities, and targets finance companies much more heavily than banks, building societies, credit unions and the PSIS.

"Fees paid by participating institutions will be changed to reflect their risk profile," said English. "They are intended to approximately match longer term normal market pricing."

For example, a participating finance company with a junk bond credit rating of BB will pay a 150 basis point fee on funds covered by the scheme, compared with 15 basis points for a AAA+ rated bank or finance company.

Finance company fees will be the same as for banks and other institutions only for ratings down to AA, at which point they diverge substantially. At AA-, the finance company fee will be set at 20 basis points, against 15% for banks and others. At a BB rating, banks will be on a 60 basis points fee.

"Deposit-taking institutions with a credit rating of BB or higher can apply to participate in the extended scheme. Institutions with a lower credit rating or no rating won't be eligilble despite being included in the current scheme."

English said the government judged that, with more than two years until the scheme runs out, there would be sufficient time for the world economy and financial markets to settle from recent turmoil and for asset values to recover and stabilise.

The extension roughly equates with the termination of an extended Australian deposit guarantee scheme, which will now end on October 31, 2011, two months earlier than New Zealand's.

Businesswire.co.nz

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