Guarantee scheme tightened

Wednesday 22nd October 2008

The Reserve Bank and Treasury tightened the rules for the deposit guarantee scheme, imposing a $1 million cap per depositor and a scale of higher charges fro lower-rated financial institutions.

The amendments come after criticism from the nation's biggest banks that the scheme, announced by Prime Minister Helen Clark at the launch of Labour's election campaign, could be open to abuse by smaller firms.

"The retail deposit guarantee scheme needs to engender confidence while continuing to ensure the efficient functioning of New Zealand financial markets," Governor Alan Bollard and Treasury Secretary John Whitehead said in a statement today.

"Refinements have been made to the scheme's pricing in order to mitigate the risk of material distortions to investor behavior and incentives and choice among institutions over the life of the guarantee, while still ensuring coverage remains affordable," they said.

Key changes include a new schedule of fees for institutions whose covered liabilities are less than $5 billion. That affects smaller banks, building societies, credit unions and the finance companies.

Institutions with a rating of at least AA- will be charged 10 basis points per annum. Between A and A+ the charge is 20 basis points. Those with a rating of BBB- to BBB+ will incur a charge of 50 basis points and those with the highest junk ratings, BB and BB+, will be charged 100 basis points.

The government had already announced a 300 basis points charge for those with a lower or no rating.

By Jonathan Underhill

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