Preferred Option
48. If the scheme is extended, the preferred option, based on the above analysis, is to extend the scheme in tighter terms in order to achieve a less disruptive and potentially less costly exit from the DGS. The decision of whether to extend the DGS until 31 December 2011 on tighter terms or proceed with the status quo of exiting in October 2010 is finely balanced.
49. The gains to system-wide financial stability from continuing the scheme, or detriments of the scheme lapsing are not large because it is only the relatively small institutions that are materially at risk. However, the risk of deposit flight to Australia is lower under the extended DGS, as it more closely aligns the end date of the DGS with that of the Australian guarantee scheme, although this overall risk is considered low. Given possible enhancements to an extended scheme, the economic efficiency arguments are finely balanced. The strongest argument is that extending the scheme reduces likely fiscal and economic costs of guaranteed firms failing by extending adjustment over a longer period, so it is more likely to improve recoveries and avoid depressing an already fragile asset market.
50. The risks with the options assessed have been considered in making a final decision, and are reflected in the cost benefit analysis.
51. The preferred option, based on the above analysis is to extend the DGS on revised terms until 31 December 2011. A more detailed description of the design features of the extended DGS is provided in Annex 2.
