Government considers policy after deposit guarantee ends

Friday 11th March 2011

The Government is consulting on options for maintaining confidence in the financial system when the Retail Deposit Guarantee Scheme expires at the end of this year.

The scheme was put in place during the global financial crisis and was extended until December 31 this year. It has been criticised for distorting flows of money as investors placed money with non-banks when the guarantee was put in place but withdrew when it was expected to expire last year. The cost of the scheme, which was toughened up when it was extended, also fell mostly on banks.

The guarantee now protects only $2 billion of the $210 billion New Zealanders have on deposit and will not be extended beyond December 31 this year, Finance Minister Bill English said.

He said the Government did not favour compulsory deposit insurance as it was difficult to price and blunted incentives for both financial institutions and depositors to monitor and manage risks properly.

"One option for minimising disruption of the financial system and maintaining investor confidence is referred to as open bank resolution," English said.

This permits banks to continue functioning while full resolution is worked through.

"This option has been available to the Reserve Bank for a number of years. This next stage is about engaging with the banks to ensure it could be implemented effectively if required," English said.

The Reserve Bank will shortly release details of an open bank resolution consultation process.

NZPA

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