Crown deposit guarantee scheme: further amendments

Thursday 23 October 2008

The Reserve Bank and Treasury issued a joint press release late on 22 October announcing further amendments to the Crown retail deposit guarantee scheme. Additional policy guidelines were also posted on the Treasury website. It appears that the framework for the scheme is largely complete and the officials will now focus on implementation. The difficult issue of whether or not to guarantee wholesale funding for banks appears to have been deferred at this stage although not totally ruled out.

The key changes are set out below.

Cap on deposits

A cap of $1 million per depositor per guaranteed institution has been introduced, with a view to ensuring that the scheme remains limited to retail deposits only. The capped amount is seen by the Crown as sufficient for household and small to medium business use, but low enough to ensure that there is no incentive for parties to develop structures that would allow wholesale deposits to be covered by the scheme.

Pricing

A revised fee structure has been announced. These fees apply to entities whose guaranteed liabilities are less than $5 billion and apply to the cumulative growth in the guaranteed portfolio from 12 October 2008 to the extent that this exceeds 10 percent per annum. The fee structure is set out below, and applies in addition to, not as a substitute for, the existing fee structure:

• 10 basis points per annum to institutions rated AA- and above;
• 20 basis points per annum to institutions rated A+, A and A-;
• 50 basis points per annum to institutions rated BBB+, BBB and BBB-; and
• 100 basis points per annum to institutions rated BB+ and BB.

Provision has been made to rebate fees for unrated entities which obtain a rating during the guarantee period.

Collective Investment Schemes (CIS)

The rules applying to CIS are currently less developed than those applying to banks and non-bank deposit takers (NBDTs). The Treasury website now notes that CIS will be eligible for guarantee coverage provided:

• they invest exclusively in New Zealand government securities or debt securities issued by institutions covered by the Crown guarantee; and
• they do not increase their investments in guaranteed institutions that are not registered banks beyond the level that existed as at 12 October 2008.

This provides a degree of clarity as to which CIS will be covered at this stage, but the underlying policy will be of concern to those offering products which will not be covered and will no doubt be debated further. As currently drafted, cash PIEs established by registered banks would be eligible for coverage, but cash PIEs established by eligible NBDTs would not be covered. This structure clearly discriminates against NBDTs in favour of registered banks, and would have a real impact on their ability to operate cash PIEs. It will be interesting to see whether this position is maintained by the Crown.

CIS that are covered by the scheme will not be charged a fee, on the basis that fees will be charged on the underlying deposits.

Guidelines

The Treasury has also released policy guidelines which cover the exercise of discretion granted to the Treasury under the scheme. The regulators have clearly retained the ability to reject applicants which may satisfy the technical requirements by including a list of "other factors that may be considered" when deciding whether or not to extend the guarantee to an applicant. These include:

• a requirement that the business practices of the applicant meet reasonable standards;
• that the individuals which control the applicant are of good character and have appropriate business experience; and
• the length of time the applicant has been in business.

All of these factors are clearly designed to ensure that regulators can eliminate any artificial applications designed solely to take advantage of the potential mismatch in pricing and risk that could otherwise arise. In our view, provided the discretion is exercised in a consistent and transparent way, this can only benefit existing market participants by removing the potential for gaming of the scheme and the further distortion of the market which would follow.

Process

New draft deeds are to be released within the next few days. Treasury expects to begin announcing approved guarantees from 28 October, with banks to be dealt with first, followed by NBDTs and CIS.

We will provide a further update once the draft deeds are released.

For further information please contact:

Murray King
Partner

David McPherson
Partner

Jonathan Ross
Partner

David Craig
Partner

Hugh Kettle
Partner