Executive Summary
1. On 12 October 2008 the current retail deposit guarantees scheme (DGS) was put in place to stabilise the financial system as result of extreme international stresses in financial markets. The temporary scheme is due to lapse on 12 October 2010, one year earlier than the Australian scheme.
2. The decision being made is not whether a retail deposit guarantee scheme should be introduced or not, but how to exit from the scheme in a way that balances the government's economic, financial stability and fiscal objectives. A range of options were assessed ranging from no change from the status quo (12 October 2010 end date) through to extending the scheme for a further period; and within this option the terms on which the scheme would be extended. The key terms of the extended scheme are the length of the extension, whether it is voluntary or compulsory, the fees that are charged, institutional eligibility, the cap on the amount of deposits that are covered, and what management and resolution levers are available to the government.
3. Having assessed each of these options against the objectives, the option that best meets the overall objectives (economic, financial and fiscal) is to extend the scheme on tighter terms for a period ending 31 December 2011. However, this option is finely balanced with the status quo option of letting the scheme cease on 12 October 2010.
4. Extending the scheme on tighter terms reduces likely fiscal costs of guaranteed institutions failing. This is because by extending adjustment over a longer but definite period it is more likely to improve recoveries, avoids depressing an already fragile asset market, and provides greater opportunity for a viable non-bank sector going forward. It provides more time for financial markets to stabilise and aligns the end of the New Zealand guarantees more closely with that of Australia.
5. The tighter terms also improve on the economic costs associated with the existing scheme from under pricing risk. Also, it puts an emphasis on managing risk and the enhancements allow for better control of the actions of financial institutions that could be potentially detrimental to the Crown and wider economy.
6. The status quo stops economic distortions from under pricing risk, but does so at potentially high fiscal and medium term economic cost, in so far as it reduces recoveries from failed institutions and it means that otherwise sound institutions are unable to survive the disorderly exit of other financial sector firms.
7. Given the time imperative, implementation is to be through urgent legislation for some or all of the stages with a limited select committee process.
