Supplementary Financial Schedules - Non-departmental

for the year ended 30 June 2010

The following supplementary financial schedules record the expenses, revenue and capital receipts, assets and liabilities that the Department manages on behalf of the Crown. These supplementary financial schedules include NZDMO balances reported on pages 116 to 126.

The Department administered $4,343 million of expenses, $4,308 million of revenue, $23 million of capital receipts, $306 million of capital expenditure, $23,979 million of assets and $69,671 million of liabilities on behalf of the Crown for the year ended 30 June 2010.

The financial information reported in these schedules is consolidated into the Financial Statements of the Government, and therefore readers of these schedules should also refer to the Financial Statements of the Government for the year ended 30 June 2010.

Overview

This overview provides details of significant expenditure and revenue variances between 2008/09 and 2009/10 and between 2009/10 actual and 2009/10 Supplementary Estimates.

Capital Charge

Capital charge receipts in 2009/10 increased by 8.6% compared with 2008/09. This was primarily owing to an increase in the capital base of departments as a result of revaluations of property, plant and equipment and capital contributions from the Crown.

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

The Government provides two guarantee schemes in relation to financial institution deposits: the Crown Deposit Guarantee Scheme and the Crown Wholesale 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.

Crown Deposit Guarantee Scheme

Scheme description

On 12 October 2008 the Minister of Finance initiated an opt-in Crown 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 Crown 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.

On 25 August 2009 the Minister of Finance announced that the Government would extend the Crown Deposit Guarantee Scheme from 13 October 2010 to 31 December 2011 with tightened eligibility criteria and additional limitations on coverage of the scheme. The changes to the scheme include restricting coverage to institutions with a credit rating of BB or higher, reducing the guaranteed amount of individual eligible deposits and changing the fee structure to include all deposits.

Scheme management

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.

Amounts guaranteed and provision for loss

As at 30 June 2010, 73 financial institutions (2009: 73) had joined the scheme and deposits totalling $133 billion (2009: $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 less than $5 billion) a provision has been made to provide for losses that are considered more likely than not to occur. The Crown continually updates both the likelihood of further default actions triggering the guarantee and the expected loss given default. Based on these assessments, the Crown has provided for a net expected loss given default of $748 million as at 30 June 2010 (2009: $816 million), being the cost of future payments to investors after expected recoveries in entities operating under the scheme as at 30 June 2010. In addition, the Crown has included liabilities of $43 million (2009: $15 million) being the cost of payments to investors in entities guaranteed under the scheme which were in receivership as at 30 June 2010.

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 Crown Deposit Guarantee Scheme cannot be provided owing to commercial sensitivity.

Crown Wholesale Guarantee Facility

On 1 November 2008 the Minister of Finance initiated an opt-in Crown Wholesale Guarantee Facility. The objective of the opt-in Crown Wholesale Guarantee Facility was to facilitate access to international financial markets by New Zealand financial institutions, in a global environment where international investors were highly risk averse and where many other governments had offered guarantees on their banks' wholesale debt. Under the Crown Wholesale Guarantee Facility, the Government received a fee from each participating institution based on the institution's credit rating and the term and amount of guaranteed debt issued.

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

• limiting the availability of the facility 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 2010, the value of wholesale securities guaranteed was $10.4 billion (2009: $5.7 billion). No provision is made in these financial statements for losses under this scheme as these are considered remote.

On 10 March 2010 the Minister of Finance announced the closure of the Crown Wholesale Guarantee Facility effective from 31 May 2010. As at 30 June 2010, the Crown had issued 25 guarantee certificates; the benefit of those guarantees will remain in place for the underlying securities until the scheduled maturity of those securities. The terms of these securities range from two to five years. Over time, the value of securities issued with the benefit of Crown guarantees will reduce, with the last guarantee certificate expiring in October 2014.