Options and Assessment

41. The broad options available to the Government are:

• Option 1 - Let the current DGS cease on 12 October 2010 (status quo option).

• Option 2 - Extend the DGS for a given period of time. Within this option an assessment is needed as to the design features of the extended scheme.

42. There are also other interventions that the government could consider on a case-by-case basis, such as providing liquidity support to firms^[4]. putting a firm in statutory management, or buying firms' bad assets through commercial transactions. These intervention options could be used in addition to, and independently of options 1-2 above that would need to be considered on a case-by-case basis depending on the entity in question.

Baseline assumptions

43. There is a significant degree of uncertainty associated with what could happen if the current DGS is left to expire on October 2010. This reflects uncertainty about whether and how quickly the economy will recover over the next 18 months, whether financial markets will continue to stabilize, and what will happen to asset prices. It also reflects uncertainty about the position of entities in the scheme, the extent of likely contagion resulting from the failure of any entities in the scheme, and the extent of any possible deposit flight to Australian guaranteed banks due to the mismatch of guarantee periods. The impact will also depend in a large part on depositor sentiment, which is very difficult to predict.

44. The option assessment is based on the following baseline assumptions about economic conditions, which are consistent with the Budget Economic and Fiscal Update (BEFU) 2009 and the RBNZ Financial Stability Report (FSR), May 2009:

• The economy is expected to be recovering in October 2011, relative to October 2010, but residential property prices are not expected to be recovering until October 2012.

• Credit conditions have tightened somewhat which is likely to have implications for the real economy.

• Financial markets have stabilised. Funding sources have stabilized for banks since the DGS was introduced, although they remain reliant on the wholesale funding guarantee facility in international markets. Funding sources remain vulnerable for non-banks due, among other things, to the impact of the recession on their asset quality. There is expected to be a further increase in impaired assets of banks and NBDTs, but they are not expected to reach levels experienced in the 1990s.

Option 1 - Status quo

45. The assessment of option 1 is provide in the status quo section of the RIS and is not repeated here.