Annex 3: Details About Consultation

The Treasury and the Reserve Bank regularly engage with stakeholders in the sector, which have provided their views on the DGS and its possible extension. This includes financial institutions, trustee corporations, unions and professional services companies. The key issues raised by these groups were:

• Distortions being created by the DGS - many non-banks are finding it difficult to attract deposits after the end of the guarantee period (creating a “wall” of maturities). A business grouping has expressed concerns about the distortions to financial markets created by the DGS.

• Timing of future arrangements - non-banks in particular require clarity about future arrangements as soon as possible.

• Extending the Scheme - mixed support for extending the Scheme to match the Australian scheme (October 2011). Banks tend to think it is not necessary for them and risk of depositor flight to Australia is low. Finance companies tend to support extension. Some Credit Unions have chosen not to opt into the DGS because they have a relatively sticky depositor base. Entities operating outside of the DGS (e.g. fund managers) are concerned about the competitive disadvantage that the Crown guarantee puts them at.

• Conditions on institutions' behaviour - it has been suggested by a workers union and an economic think tank that there should be conditions added to firms that are part of the DGS, e.g. employment protection/ mortgage holiday provisions.

• Fee structure - fees should be more risk-based, and not involve cross-subsidisation of non-banks by banks.

• Eligibility criteria - concerns were raised in the media about whether Mascot Finance should have been eligible for the DGS, given that it was in wind down.

Stakeholder views have been considered when developing the policy proposals as summarised below.

• The extended DGS is designed to minimise economic distortions by having much more risk sensitive pricing. It is designed with a definite end date, to help reduce the risk of another wall of maturities forming before the end of the guarantee period.

• It is recommended that an announcement be made soon to give depositors and deposit taking institutions certainty about the future of the DGS, and make informed planning decisions. It is also recommended that changes be passed under urgency, with cross-party support to provide the market with certainty.

• On balance, it is recommended that the DGS is extended until 31 December 2011. The Scheme will be voluntary to join, and will be on more risk sensitive firms to help to minimise distortions between entities and products within and outside of the guarantee. The fees charged to banks, credit unions, building societies and the PSIS are lower than finance companies to reflect the higher loss given default of finance companies compared to these other entities.

• We have assessed the idea of introducing conditions on the guarantee, but consider such conditions may undermine the objectives of the guarantee, e.g. it may stop firms downsizing, when that sort of change is necessary to ensure their future viability.

• The fees will be more risk-sensitive and based on the probability of default and expected loss given default. Fees will apply to the whole deposit book of both banks and non-banks (previously, they effectively just applied to growth of non-banks, and deposits in banks over $5 billion).

• The eligibility criteria for entry to the extended DGS will be set at a minimum BB credit rating or above. The current DGS did not have such an eligibility criteria when it was introduced.

The DGS operational team focuses engagements on the larger and relatively riskier entities in the DGS, and meets with entities on an ad hoc basis. Over the last month, the DGS team has met with these larger entities on several occasions to discuss the DGS.