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What do institutions need to know? Part 4 - Questions and Answers - Retail Deposit Guarantee Scheme

Page updated 12 Oct 2010

Disclaimer: The information posted here as Questions and Answers is provided for general guidance only. The terms of the Guarantee deeds signed by approved institutions (not the terms of these guidance notes) are the rules that govern all arrangements pertaining to the Crown's guarantee and the obligations that bind approved institutions. The Treasury is administrator of the guarantee on behalf of the Crown and is not an independent adviser to depositors about financial or legal issues.

The guidance contained in these Questions and Answers are subject to ongoing clarification, addition and amendment. Please press F5 to refresh this page, to ensure you are viewing the most up-to-date information.

Questions and Answers

4.1 How much does it cost for institutions to be covered by the scheme?

Updated 12 Oct 2010

Fees are charged on the entire amount of debt securities that are guaranteed and depend in part on the type of institution that is covered and in part on the credit rating that the institution holds, on the following basis:

Credit rating

Finance Companies (basis points)

Banks, Credit Unions,
Building Societies,
PSIS (basis points)

AAA +/-

15

15

AA+

15

15

AA

15

15

AA-

20

15

A+

25

20

A

30

20

A-

40

20

BBB +

60

25

BBB

80

30

BBB-

100

40

BB+

120

50

BB

150

60

Fees are charged monthly. If the credit rating of an institution that is participating in the retail deposit guarantee scheme improves from the credit rating it held on 31 October 2010, then that institution shall be entitled to a rebate on the fees that it has paid. If the credit rating of an institution falls below BB the fees that will apply are those that apply to a BB rated institution.

4.2 What is the cost to the Crown?

Updated 12 Oct 2010

The total costs of the scheme depends on how much the Crown has to pay in the event of defaults by participating institutions, and the final amounts recovered by the Crown under the terms of the guarantee deeds.

The Treasury's estimates of likely total costs are included in the latest Monthly Financial Statements of the Government.

The Crown generates revenue from recoveries and from fees paid by institutions participating in the retail deposit guarantee scheme. Recoveries and fee income information is included in the latest Year End Financial Statements of the Government.

4.3 Was or is my financial institution eligible to participate in the retail deposit guarantee scheme?

Updated 12 Oct 2010

Institutions eligible for admission into the Crown retail deposit guarantee scheme are:

  • registered banks;
  • building societies;
  • credit unions;
  • other deposit takers such as finance companies;

that:

  • were members of the previous Crown retail deposit guarantee scheme as at the date of application;
  • had not been subject to a default event (as defined in the Crown Deed of Guarantee under the previous Crown retail deposit guarantee scheme);
  • had not had their guarantees withdrawn under the previous Crown retail deposit guarantee scheme (without that guarantee being replaced); and
  • hold a credit rating equivalent to BB or better from Standards and Poors, Moody's or Fitch. Credit ratings are explained here http://www.sorted.org.nz/home/sorted-sections/investing/credit-ratings

To be approved for the Crown retail deposit guarantee scheme, a financial institution must also:

  • issue debt securities to the public;
  • be in the business of borrowing and lending, or providing financial services, or both;
  • carry out a substantial portion of their business in New Zealand;
  • not primarily provide financial services or lend to related parties and group members.

Collective investments schemes (including PIE funds) are not eligible to participate in the extended Crown retail deposit guarantee scheme.

4.4 How does an institution apply to become part of the Crown retail deposit guarantee scheme?

Updated 12 Oct 2010

Applicants must have submitted their application no later than 11 October 2010. New institutions that have gained registration as a bank and that hold a credit rating equivalent to BB or better from Standards and Poors, Moody's or Fitch will also be eligible to apply to become members of the Crown retail deposit guarantee scheme.

In addition, new institutions that are the product of a merger are eligible to apply to become members of the Crown retail deposit guarantee scheme, so long as:

  • one of the institutions that is a party to that merger is already a member of the scheme; and
  • the merged institution holds a credit rating equivalent to BB or better from Standard and Poors, Moody's or Fitch.

4.5 Under what circumstances can the Crown withdraw the deeds of guarantee?

Updated 12 Oct 2010

Please see answers to questions 1.17 and 1.19.

4.6 Do institutions have any specific obligations under the Crown guarantee that they otherwise would not have?

Updated 12 Oct 2010

Yes, institutions that sign a Crown deed of guarantee have additional obligations beyond those imposed by New Zealand laws and regulations. These obligations are summarised below.

The Crown may at any time appoint an inspector to report on the institution and the institution must provide access to its books and records and make its directors and senior officers available to help the inspector prepare his or her report. They must:

  • not provide financial assistance to help in the purchase of their own shares without the prior written consent of the Crown;
  • not enter into any related party transactions that have a value in excess of 1% of its total tangible assets, without the prior written consent of the Crown;
  • give the Crown advance notice of any proposed change in control (together with information about that change in control);
  • not agree to any change in the institution's prior charge ratio without Crown approval;
  • not vary or increase the value or amount secured by prior charges without the Crown's prior written consent;
  • comply with all prudential requirements applicable to it and the terms of its trust deed (if any) and those of the debt securities it issues;
  • not make distributions without the Crown's prior written consent;
  • not enter into transactions that exceed 1% of total tangible assets other than on an arm's length basis;
  • immediately advise the Crown of the occurrence of any default event;
  • conduct business in a prudent and businesslike manner;
  • procure an undertaking from the institution's directors (if required by the Crown) to:
  • notify the Crown immediately of any breach of the terms of the Crown guarantee; and
  • use their best efforts to see that the financial institution complies with its obligations under the relevant Crown guarantee deed;
  • where non guaranteed deposits are issued, ensure that offering documentation and advertisements for those non guaranteed deposits clearly and prominently warn investors that those debt securities are not covered by the Crown guarantee (see answer to question 1.5 for further guidance);
  • provide the Crown with such assistance as the Crown should reasonably request, in order to help the Crown in its management and administration of the current Crown retail deposit guarantee scheme;
  • advise the Crown of proposed changes to the terms of its trust deed or debt securities;
  • provide to the Crown, on request:
  • any information about its business and affairs and those of its subsidiaries and group members; and
  • any information about any investor or proposed investor in the financial institution.

Some of these obligations apply only to non-bank institutions.

If an approved institution fails to comply with these obligations, the Crown may withdraw the guarantee in respect of deposits or investments made after the date of the withdrawal.

4.7 If a deposit taking institution is approved for the guarantee, will deposits by eligible creditors that are guaranteed under the previous scheme but that mature beyond 12 October 2010 automatically be covered by the guarantee?

Updated 12 Oct 2010

Yes, deposits made before 12 October 2010 will be covered by the guarantee if the deposit taking institution is approved for the guarantee, except to the extent that individual depositors are affected by changes to eligibility criteria between the previous scheme and the current scheme, or by the reduced cap applying from 12 October 2010.

4.8 Will institutions that participate in the guarantee scheme be charged fees on deposits made prior to 12 October 2010 that continue to be guaranteed under the extended guarantee?

Updated 12 Oct 2010

Yes, fees will be charged on deposits that continue to be guaranteed.

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