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NZ Treasury gets pass mark for deposit guarantee scheme, but was too hands-off: auditor general

Tuesday 4th October 2011 1 Comment

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Auditor General Lyn Provost has given the government’s retail deposit guarantee scheme a pass mark, but ticked off the Treasury for not being more proactive in trying to minimise costs to the taxpayer of as much as $1.1 billion.

The scheme, which was set up in the dying days of the previous administration in response to the global financial crisis in 2008, offered depositors a government guarantee that they would be repaid. Provost said the scheme was successful in helping avoid any bank failures and enabling many non-bank lenders to survive the downturn.

So far, nine non-bank lenders have called on the scheme, the biggest being South Canterbury Finance, with total payments of about $2 billion. Provost said the government expects to claw back about $900 million of that as a creditor.

Provost said Treasury officials should have been hands-on in dealing with guaranteed institutions, but stopped short of saying this would have saved the government money.

“The view appeared to be that it was better to recover what funds it could after an institution failed, than try to influence events before a failure,” Provost said. “In my view, this approach relied too heavily on the presumption of minimal intervention and gave insufficient weight to the need to manage the overall potential cost to the Crown.”

Provost said the Treasury was in a “reactive mode for too long, responding to needs as they emerged, rather than systematically anticipating and preparing for the next eventuality.”

Last year, the Auditor General said it would audit the scheme, focusing on how the Treasury set up and managed the guarantee.

Treasury’s haste to set up the guarantee under pressure was commendable, but “done at the expense of setting up good governance arrangements for the overall management of the scheme and planning for the rest of the work that would be needed,” Provost said.

The guarantee encouraged some finance companies to increase their risk, with South Canterbury ramping up lending to property developers, while at the same time boosting deposits 25% from the time the scheme was introduced to early 2009.

The Auditor General’s report recommended Treasury set up a framework to help implement large and complex initiatives, put in place reporting regimes for these types of initiatives, carry out a formal review when it implements significant policy, and work with the Reserve Bank to document their analysis and thinking during the failure of SCF.

Treasury Secretary Gabriel Makhlouf welcomed the report, saying its findings show the department’s management was “good but not perfect” and offers “valuable lessons.”

He rejected the assertion that the Treasury was too hands off, saying it “couldn’t find a case where intervention was more likely to create a better outcome.”


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Comments from our readers

On 4 October 2011 at 5:29 pm JohnSu said:
I guess we now know why the Treasury estimates are always out by + or - a Billion.
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