Wednesday, 15 October 2008


Fears rise of deposit plan 'mess' Public fears over the safety of their savings may have been assuaged but the Government's hastily drafted deposit guarantee scheme has stoked fears of a "horrendous mess" in the finance company sector and other investment markets.

The scheme announced on Sunday sees the Goverment guaranteed the deposits of banks, building societies, credit unions, finance companies and other deposit-taking institutions.

By late yesterday all the major banks along with two finance companies had opted into the scheme which is free for companies with less than $5 billion in deposits.

The controversial decision to extend the scheme's coverage to finance companies is widely believed to be intended to prevent a flight of capital from finance companies into government guaranteed bank deposits.

However details, including whether finance companies who have already breached their trust deeds would be eligible if they cleaned up their act, have yet to be released.

A Reserve Bank spokesman yesterday said the bank and Treasury were working on this and other aspects of the scheme but he could not say when further information would be released.

Victoria University professor of economics and finance Roger Bowden said there were a lot of unanswered questions about the scheme, but should it be extended widely to finance companies it would create "a horrendous mess".

With an explicit government guarantee, finance companies who generally make riskier loans and consequently pay higher interest rates "now need pay no more than the banks".

Meanwhile larger banks, including Kiwibank, which have more than $5 billion in deposits will have to pay a fee to participate in the scheme unlike their smaller and riskier finance company counterparts for whom it is free, effectively subsidising them.

"It's screwed the natural pricing to hell and back," said Bowden. "The banks are entitled to very annoyed.

"Of course, there's also going to be a huge backlash among the poor people who have lost money in finance companies in the past."

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1 comment:

Roddy said...

What about JK's comment last night about the letter he sent to HC several years ago about improving finance company regulation - he saw the collapses coming and HC did nothing when she had the opportunity. That letter would be worth getting hold of and publishing ...