Crown Deposit Guarantee Scheme – update

In our Spring 2008 issue of Financial Services Quarterly, we set out an overview of the Crown Deposit Guarantee Scheme. Set out below is an update on progress since then.

At this stage, three institutions have entered into a Deed of Guarantee with the Crown in respect of the Wholesale Funding Guarantee (the Guarantee).

While their entry into the Deed gives them access to the Guarantee, it does not guarantee any particular debt instrument. The Guarantee is structured so that, once an institution has been granted access to it, the institution must then apply for each individual instrument to be covered by it. Once the Crown has approved an instrument, it will issue a guarantee eligibility certificate confirming that the relevant liability is covered by the Guarantee. To date, only Bank of New Zealand has been issued a certificate in respect of a five year bond programme.

The Guarantee is designed to be used where required, and participating institutions will be encouraged to withdraw from using the Guarantee when "market conditions permit".

The Guarantee will cover an instrument until the earlier of:

• expiry of the instrument; and

• five years following its issue.

The Crown continues to maintain that each decision to grant a guarantee with a specific entity, and to issue a Certificate, is at its sole discretion.

Although not specifically confirmed, it appears that the New Zealand Treasury will issue an enforceability opinion in respect of each Guarantee. This opinion is expected to be in a standard form and we would expect it to accompany each Guarantee.

Since our overview of the scheme, the one noteworthy change has been a reduction of the fee payable. The reduction amounts to 15 or 50 basis points in respect of the term of the guaranteed instrument. The Treasury has advised that the change was made to take into account the changing market environment.

The revised fees are set out below:

Enquiries and information

For more information on any of the cases, articles and features in Financial Services Quarterly, please email Rachel Gowing or call on 64 9 916 8825.