Overview

Capital Charge

Capital charge receipts in 2008/09 increased by 8.6% compared with 2007/08. This was primarily owing to an increase in the capital base of departments as a result of revaluations of property, plant and equipment.

Crown Guarantee Schemes: Crown Retail Deposit Guarantee Scheme and Wholesale Funding Guarantee Facility

The Government provides two guarantee schemes in relation to financial institution deposits: the Retail Deposit Guarantee Scheme and the Wholesale Funding Guarantee Facility. Information on the Government's exposure as a result of these schemes, the management of these exposures and the impact of these schemes is detailed below.

Retail Deposit Guarantee Scheme

On 12 October 2008 the Minister of Finance initiated an opt-in Retail Deposit Guarantee Scheme. The objective of this scheme is to ensure ongoing retail depositor confidence in New Zealand's financial system given the international financial market turbulence. Under the Retail Deposit Guarantee Scheme, fees are payable to the Government by participating institutions if they hold significant deposits (ie, greater than $5 billion) or if they experience significant growth in deposits (ie, greater than 10% per annum). Approved deposit takers to date are listed on the Treasury website.

The Government is managing its exposure to this risk both through the prudential regulation processes for registered banks, and by requiring other deposit takers who sign the guarantee to agree to certain controls on their business including:

• some restrictions on distributions to shareholders
• some assurance that the business dealings of the deposit taker are on arm's-length terms
• the ability for the Crown to appoint an inspector
• the ability for the Crown to withdraw the guarantee if the business is being deliberately operated in a way to undermine the intention of the guarantee, and
• personal undertakings from directors to ensure the non-bank deposit takers comply with the guarantee.

In addition, the Crown has established a monitoring regime to continually assess the risk associated with the scheme as it develops.

As at 30 June 2009, 73 financial institutions had joined the scheme and deposits totalling $124.2 billion had been guaranteed. This is the maximum exposure and does not include any offset resulting from the recovery of the remaining assets of the financial institution in the event the guarantee is called upon. The Crown assesses the potential loss to be associated with the entities that hold significant deposits (ie, greater than $5 billion) as being remote. It is recognising the revenue received from these institutions over the guarantee period and has made no provision for any loss associated with these entities.

For other entities within the scheme (ie, entities that hold deposits of less than $5 billion) a provision has been made both when guarantees have been triggered and to provide for losses that are more likely than not to occur. Guarantees have been triggered for two entities and the estimated total cost of payments associated with these guarantees of $70 million has been included in Other Expenses Incurred by the Crown - Payment in Respect of Guarantees and Indemnities (page 93). The payments are offset by expected recoveries of $34 million included within Other Current Revenue (page 96). The Crown also continually updates the likelihood of further default actions triggering the guarantee and assesses the expected loss given default. Based on these assessments, the Crown has provided for $816 million as at 30 June 2009 for future payments under this scheme. The provision has been made applying the assumption that the Retail Deposit Guarantee Scheme will finish in October 2010, the policy position as at 30 June 2009. The policy decision to extend and amend the Retail Deposit Guarantee Scheme announced on Tuesday 25 August 2009 represents a change in conditions that arose after the reporting period, it has not led to an adjustment of the provision. This decision would however be unlikely to significantly impact the amount of the provision.

The Treasury notes that while the provision represents a best estimate of likely loss, a significant range of outcomes are possible under the scheme in terms of which entities may default and the eventual loss to the Crown following an event of default. This reflects the significant uncertainty as to the value that can be realised from an entity's assets following an event of default. Except as provided on the Treasury website, further information on the Retail Deposit Guarantee Scheme cannot be provided due to commercial sensitivity.

Wholesale Funding Guarantee Facility

On 1 November 2008 the Minister of Finance initiated an opt-in Wholesale Funding Guarantee Facility. The objective of the opt-in Wholesale Funding Guarantee Facility is to facilitate access to international financial markets by New Zealand financial institutions, in a global environment where international investors remain highly risk averse and where many other governments have offered guarantees on their banks' wholesale debt. Under the Wholesale Funding Guarantee Facility, the Government receives a fee from each participating institution based on the institution's credit rating and the term and amount of guaranteed debt issued. Fees of $6 million were recognised for the 2008/09 year (page 96) and deferred revenue for this scheme of $131 million appears on the Schedule of Liabilities (page 99).

Deposit-taking financial institutions utilising the Wholesale Funding Guarantee Facility have applied for a guarantee under the Crown Retail Deposit Guarantee Scheme. In addition to the risk management under the retail scheme, the Government further manages its risk exposure by:

• limiting the availability of the scheme to financial institutions that have an investment grade credit rating (BBB- or better), and have substantial New Zealand borrowing and lending operations (but not to institutions that are simply financing a parent or related company)
• limiting the amount of debt covered by the guarantee to debt up to 125% of the total stock of eligible types of debt in issue prior to the intensification of the crisis
• establishing additional capital buffers by requiring an additional 2% Tier 1 capital buffer above the 4% regulatory minimum, and
• requiring the debt issuer to hedge and manage any foreign exchange risk.

As at 30 June 2009, $5.7 billion wholesale securities had been guaranteed. No provision is made in these financial statements for losses under this scheme as these are considered remote.

Dividends

SOE dividends decreased by $246 million from 2007/08 (page 96), primarily owing to a reduction in dividends from Meridian Energy from those paid in previous years. The aggregate dividend reductions were owing to numerous factors including changes in economic and hydrological conditions.

Net Foreign Exchange (Losses)/Gains

Net foreign exchange gains were $21 million in 2008/09, compared with $7 million in 2007/08, as a result of movements in exchange rates affecting the value of New Zealand's shareholding in the Asian Development Bank and the World Bank (page 96). The increase in value of these investments is also reflected in Other Share Investments (page 98). NZDMO incurred net foreign exchange losses of $5 million in 2008/09, compared with net losses of $15 million in 2007/08 owing to movements in foreign exchange rates.