Crown deposit guarantee scheme

Tuesday 14 October 2008

In response to similar initiatives by governments around the world, the New Zealand Government has introduced a deposit guarantee scheme. While specific details are yet to be finalised, the following information has been released by the Reserve Bank and the Treasury.

What is the scheme?

• The scheme guarantees deposits made by retail investors with certain types of financial institutions.

• It is a guarantee of principal and interest.

• The guarantee covers a guaranteed financial institution which goes into default between 12 October 2008 and 12 October 2010. Institutions with retail deposits of up to $5 billion will not pay any fee to access the scheme. Institutions with retail deposits over $5 billion will pay $1 million for every additional $1 billion of guaranteed deposits.

• There is no limit on the size of deposits to be guaranteed, as has been the case in some foreign jurisdictions.

Why is it necessary?

To ensure ongoing depositor confidence in New Zealand and to align the New Zealand market with the rest of the world. Failure to act would have eventually resulted in migration of deposits from New Zealand banks to guaranteed banks offshore.

Who does it apply to?

• The Crown will guarantee all retail deposits made by:

  • residents and non-residents with New Zealand registered banks. This will include overseas banks which have incorporated in New Zealand; and

  • New Zealand citizens and New Zealand tax residents with non bank deposit takers and unincorporated branches of overseas banks.

• The issue of what will constitute a "non bank deposit taker" is the biggest unknown of the scheme at this stage. The best guidance comes from the definition in the Reserve Bank of New Zealand Amendment Act 2008, which defines a deposit taker as "a person who offers debt securities to the public in New Zealand and who carries on the business of borrowing and lending money, or providing financial services, or both". The term "non bank deposit taker" is expected to be clarified in the next few days and will be critical for entities on the borderline, such as managed funds.

• A non bank deposit taker will not be able to access the scheme if it is in breach of its Trust Deed.

• It is anticipated that cash PIEs issued by deposit takers who are themselves eligible to apply for the guarantee, will be eligible.

What is guaranteed?

The guarantee applies to all retail deposits made by the classes of people described above. This effectively means all deposits except those made by financial institutions themselves and deposits made by parties related to the guaranteed institution.

Can the guarantee be revoked?

• There are provisions enabling the Crown to revoke the guarantee if:

  • guaranteed institutions fail to comply with prudential supervision requirements or their Trust Deed, as the case may be, going forward; or

  • guaranteed institutions fail to provide requested information to the Crown or any information provided is not accurate.

• There are specified public notice requirements which will apply before the guarantee is withdrawn in respect of an institution. Following the withdrawal date, the guarantee will continue to protect deposits in place prior to the withdrawal, and interest on those deposits. New deposits after the withdrawal date will not be protected.

How do I access the scheme?

• Financial institutions that meet the criteria are required to "opt-in". The Treasury has published an application document that requires a brief summary of information regarding directors, corporate structure, business description, financial statements and full information about the value of outstanding debt securities on issue.

• Importantly, any institutions which are in default cannot access the scheme.

• Individuals, the ultimate beneficiaries, will be able to check if an institution is part of the scheme on the Reserve Bank of New Zealand's website: www.rbnz.govt.nz.

• While it is anticipated all eligible institutions will apply, the decision to provide a guarantee for any specific institution will be at the sole discretion of the Crown.

Where to from here?

We expect further information to emerge from the Reserve Bank and the Treasury over the next few days clarifying the ambit of the scheme. In particular:

• what will constitute a non bank deposit taker;

• the effect of the scheme on distressed finance companies currently in, or negotiating, a moratorium. The early suggestion is that they may benefit from the scheme if they comply with their Trust Deed as amended by an approved moratorium proposal; and

• the extent to which the Treasury will exercise its discretion to decline applicants. This may be the simplest way to prevent abuse of the scheme but will undermine the scheme if it leads to a lack of transparency and certainty which is vital for financial markets.

 

For further information please contact:

Murray King
Partner

David McPherson
Partner

David Craig
Partner

Hugh Kettle
Partner