Crown Retail Deposit Guarantee Scheme Bill

I rise to speak to Part 1 of the Crown Retail Deposit Guarantee Scheme Bill. This is obviously the Committee stage, and questions have been raised by one or two previous speakers about why there will be no select committee process for this bill. I will quickly touch on that first—because, as you will note, Mr Chairman, Part 1 is quite a small part.

Quite simply, this bill potentially has commercial impact on the equity, the share price, and the debt price not only of New Zealand institutions but of institutions around the world, particularly the parent institutions of some of the banks in New Zealand. I ask members to imagine the bill going through our normal select committee process, with submitters arguing about what the various ratings and costings should be. I can understand why someone would like that process, but this bill is quite particular, and we do note that when the guarantee scheme was first initiated, according to the underlying rules and regulations here, it did not go through any select committee process. It was brought in under urgent circumstances by the previous administration, as speakers have noted during the first and second readings.

So it seems somewhat unusual that something that is more of a voluntary extension supposedly needs to go through a select committee process. The imperative is that the markets are closed, at least in New Zealand, but members may notice that some debt prices moved around quite substantially when the media discussed whether the deposit guarantee scheme would be extended.

Another point is that a previous speaker thought that the current scheme ends in about 4 weeks’ time. In fact, it ends on 12 October 2010, so it ends in 4 weeks and 1 year. That might seem a minor matter, but it is essential to what is being implemented here. Again, this is an extension of about 14 months in about 13 months’ time.

Again, I know we are in Committee, but I note that the scheme was brought in to ensure liquidity in the market. Liquidity was needed to keep money moving around, to keep loans, and to keep the velocity of money in the economy happening, because, as we recall, it was frozen at the time, and there was no liquidity out there whatsoever. That was the imperative reason why the scheme was brought in, and, interestingly, this now addresses the difference between the Australian scheme of about 3 years at the time and the New Zealand scheme of 2 years. But it recognises that things have changed, and that the risks to the taxpayer and the institutions themselves, hopefully, will have played out somewhat.

Again, a previous speaker seemed to miss the point that the scheme is voluntary for larger banks. So they are getting no subsidy whatsoever, and, in fact, the charges for them, released by the Minister 2 weeks or so ago, were higher than what they are currently paying under the existing deposit guarantee scheme. So they will be making a rational economic decision as to whether they are included in the extended scheme. Hopefully, at that time, as far as the taxpayer is concerned, the larger banks will not be in the scheme, because they feel no need to be. Hopefully, liquidity will be back in the system and things will be moving towards normality. If that was the case, the underlying contingent liability on the books of $120 billion would probably move down to something like $30 billion. From the taxpayer’s point of view that is not a bad deal. I note that members opposite are voting for the bill, and I am sure they have some issues to raise.

I have one final point in relation to Part 1. The mortgage-backed securities that the member was talking about were, allegedly, supposed to be matched books. So if the funding on the liability side, the term and the maturity of it, matched the asset side, it did not matter too much whether they had guarantees, because they had matched funding books. So they lent long and borrowed short, and therein lies the problem of much of the New Zealand financial system, which this bill, plus the changes to the non-bank deposit takers, which are coming in within the next year, will start to address. Thank you, Mr Chair.

I rise to take a call in the Committee stage of the Crown Retail Deposit Guarantee Scheme Bill. I want to focus on two particular issues: first, the level of consultation on the bill, and, second, the costs in relation to the role of the banks.

Let us begin with the costs, because that issue—the participation or not of the banks and whether that makes a difference—has been raised by several of the speakers from Labour. So far we have been discussing that in qualitative terms. We have said it would be better in principle if those banks that were benefiting from the wholesale guarantee scheme were also in the retail scheme to spread the risk and, I presume from the point of view of the fiscal system and the Crown, to ensure that there was adequate fee revenue. But we have not yet gone into the details of what that fee revenue is, so I thought it would be instructive to look at some of the numbers.

Fees to date on the retail guarantee scheme, in the regulatory impact statement, are $87.4 million, which is slightly more modest than the $119 million per annum forecast in the original proposal. Here is the rub: of the $87.4 million, $81.9 million is fees from banks and only $5.5 million is fees from non-bank financial institutions. So if the banks are out, which this Government is prepared to allow, the revenue stream to the Crown collapses and, arguably, the Crown is left holding an elevated average level of risk in the face of a much reduced level of revenue offset.

The position is even worse if one looks at the interrelationship between the retail guarantee scheme and the wholesale guarantee scheme. These numbers are really quite significant if we go back to the original projections. For the wholesale guarantee scheme, overwhelmingly from the bank rather than the non-bank sector, the figures are $300 million in the 2008-09 financial year; $450 million—and this is just the fees to the Crown—in 2009-10; $400 million in 2010-11; and $1.15 billion between 2011-12 and 2016-17. That is a total of $2.3 billion in revenue to the Crown in fees from financial institutions for the wholesale scheme alone. It is little wonder then that the banks are perhaps keen not to participate in some of those streams at their choice, and the parent banks in Australia, we understand, are considering their options.

The point is simply that if the Government is going to allow banks to pick and choose which of the schemes they will maintain a presence in, the fee revenue to the Crown will collapse and the taxpayer will be left supporting a riskier bundle of assets. That is a significant issue and I call on the Minister of Finance to take a call to defend that and to say whether and how the remaining revenue streams will sufficiently offset the risk that the Crown is taking.

There is another issue that has been much the subject of debate in the latter part of the first reading. It is the question raised by the Hon Lianne Dalziel about lack of consultation. Yes, it is true, as I have previously stated, that the Minister has allowed officials to brief Opposition spokespeople, and we welcome that. But as my colleague has pointed out, that is a poor substitute for a proper select committee process where interested parties, the public, and members from around the Chamber get to ask formal questions on the record of officials and to deal with the matter in submissions. We do not believe that with the existing scheme going as long as October 2010 there was a necessity to rush this bill through in urgency without at least a limited select committee process. We think that is a matter of regret.

I guess there is a growing feeling in the community that one of the hallmarks of this Government is either the refusal to consult or the setting up of processes best described as sham consultation. A couple of examples might serve to illustrate the point. The first is, of course, the Auckland legislation in several tranches. The first one, which terminates the existing territorial authorities, was rammed through under urgency with no consultation and no select committee process. It terminated the existing institutions, thereby making change a veritable fait accompli. The second issue was the subject of the Māori seats for the Auckland super-city. A special committee was set up but the Government did not even refer to the results of that select committee because it had not yet reported. The decision was made in Cabinet without reference to the report, and poor old John Carter, a decent bloke, was left presiding over a select committee that was not a real process. He, the Minister responsible for the bill—

The CHAIRPERSON (Eric Roy): The member will come back to the bill.

A further example of the lack of consultation is the adult and community education cuts—a matter that I am sure the Government will—

The CHAIRPERSON (Eric Roy): Can you talk about this bill.

The reason this is relevant is that this bill is yet another example of the Government dispensing with the select committee process at its behest, at its fiat, saying: “The poor little public does not need to be troubled with the details of this. We, the learned and important members of the Government benches, shall decide for the peasants and inform them when the decision is made.” Unfortunately, those peasants vote; those people vote, and it is very, very important—

💬 Hon Dr Jonathan Coleman: Peasants—like they did in the last election!

That was a quote from the Government. I say to Mr Coleman, the electoral maestro of Mt Albert, that I would be rather careful if I were him, in this regard.

I sum up the position as follows. The objectives of this bill are reasonable. The option that the Government has chosen, which is to broadly extend, under somewhat tighter circumstances, the life of the retail scheme to match that across the Tasman, is a reasonable position to take. I note that the Government is not foreclosing on the option of a permanent deposit guarantee scheme when further research has been done, and we look forward to consultation on that matter.

The issue is in the fine print. The regulatory impact statement was not publicly available. It is on Treasury’s website, and people can go to that, but it was not publicly available with the bill. The select committee process has not happened at all, and we are doing this under urgency, for something that does not fall due until October next year. It is not clear why that has been required. The Government has not maintained, crucially, the position of the previous Government to very politely but firmly say to the banking sector that if it wants the benefits of the wholesale scheme, it should be in the retail scheme, as well. The numbers prove why that matters. Ninety percent of the revenue to the Crown that covers the Crown’s risk exposure—around $180 billion of risk exposure—is through the banks’ participation in the scheme, not the non-bank finance sector’s participation.

Something we are all agreed on is that the non-bank finance sector needs further work. Of course, it was the previous Government that brought in legislation to expand the oversight of the Reserve Bank into that sector, and we hope that the current Government will continue the work to clean up and tidy up the non-bank financial institutions. The question that we will find out from hindsight is whether the BB rating and the move to require participation on that basis will be a step too far for some. We hope that the Government will continue to work constructively with the sector and with the Opposition to iron out those speed bumps, and we look forward to working with the Government on the long-term deposit guarantee scheme if that occurs. Thank you, Mr Chairman.

I rise to take a call on Part 1 of the Crown Retail Deposit Guarantee Scheme Bill, and before I start I really have to comment on the speech made by the member who has just resumed his seat, David Cunliffe. He purported to make quite some mileage out of the fact that this bill is being passed under urgency and he purports to be quite concerned about this. That concern does not extend, obviously, to his not voting for it. To me, the fact that that member does not understand the urgency that relates to this measure, notwithstanding that we are 12 months out from the expiry date, really highlights his lack of grasp of this area. Retail deposits are not decided on the day they fall due. The retail market in deposits needs to know now what the situation will be 12 months out, and preferably 18 and 24 months out.

Anyone in the financial market understands that this matter is urgent, so we need to process this legislation quickly. Already the sector is calling out for some guidance. Already we are seeing that decisions are not being made and that investor confidence is starting to flag, because that guidance is not there. We have to process this bill as a matter of urgency, and if that member had a better grasp of financial reality and the reality of financial retail deposits, he would understand that. Clearly, he does not; none the less, his purported concern does not extend to not supporting the bill. Furthermore, I would have thought that the fact that there is unanimous support for this bill across the Chamber would tend to suggest that it is quite appropriate for it to be processed in this way. I would have thought that those members would be supporting the process, but if they want to score points, that is fine.

The bill is focused on ensuring depositor confidence. As I said in my first reading contribution, it is this country’s stable financial system and stable banking system that has enabled us to avoid the worst part of the global recession, which the rest of the world is experiencing. We are lucky in this country that we have a relatively stable financial sector—

💬 Hon David Cunliffe: So?

—and it is important that we work to maintain confidence in it. The member opposite says: “So?”. It is no big deal to him whether there is stability and confidence in the market. Those members opposite could not care less, because they do not understand that side of it. We have to have a stable system and a viable banking and non-banking sector. That is what this bill does and that is why the scheme has been extended. That is why National set aside its political point-scoring when the scheme was put in place last year, and that is why National, now in Government, is acting quickly to ensure that there will be ongoing confidence in the scheme as New Zealand develops its path out of this recession.

As the New Zealand recovery continues to consolidate, we want to ensure that that deposit guarantee remains in place so that we do not see a loss of confidence in New Zealand and so that we do not see investors looking to move their money into Australian equivalents, which would continue to have a guarantee in place. It is important in our close trans-Tasman relationship that we work on similar terms in this market. We have always tried to benchmark ourselves to Australia to a certain extent, and there is a real risk, in my view, that if we had left the expiry date at October of next year, then we would have seen a preference for many of our investors to invest across the Tasman. As I have already mentioned, if we lose deposits in New Zealand we lose liquidity for our businesses, we lose jobs, and we lose productivity. It means mums and dads not being able to feed the kids or pay the mortgage because they have lost their jobs because the business could not get funding. There is a real social cost to not getting this right, so that is why I applaud our Government for taking urgent steps to put this legislation in place.

I turn to one particular aspect of Part 1, and that is clause 3, “Interpretation”, which gives us some important criteria around what the Act will do. The lawyers in the Chamber will know that the interpretation clause, which is much overlooked by laypeople, is in fact one of the most important clauses of any bill. I want to look in particular at the terms “eligible entity” and “debt security”. Under this bill, the Minister of Finance is able to set criteria for the eligible entities, and I think we need to be conscious of the fact that the Minister, in doing so, has to be clear that it is necessary or expedient in the public interest. I think the words “necessary or expedient in the public interest” are the key words. This whole legislation, this whole retail guarantee scheme, is about working in the public interest. As I have said, a stable banking system, the confidence of mum and dad investors, and the continuation of liquidity in our financial markets are key for New Zealand. They are key for our economy and they are central to the public interest.

I want to return to the issue of consultation, which I raised in the second reading debate on the Crown Retail Deposit Guarantee Scheme Bill. I have in front of me the 25-page regulatory impact statement, which I downloaded from Treasury’s website during the dinner break and which, of course, was not included in detail in the bill, largely because it would dominate the bill, as the bill is so small. The executive summary of the regulatory impact statement is all that appears in the bill itself. I think it is important that we have a discussion about what we were actually seeking, which was something that Treasury itself recommended in the regulatory impact statement. We have just heard from the member Amy Adams that somehow we are asking for a full 6 months at a select committee, which we are not. We are simply asking for what Treasury recommended as an appropriate process, given that there has not been adequate consultation.

Let me read paragraph 65 of the regulatory impact statement: “The proposals for policy changes to the retail DGS were developed by The Treasury and the Reserve Bank of New Zealand in consultation with the Ministry of Economic Development (including the Companies Office), and the Securities Commission. These views have been reflected in the policy development. Annex 3 provides further detail on the issues raised in consultation and how these were dealt with.” These agencies developed the legislation that we have before us today. I actually believe that parliamentarians have a right to hear from those officials, to be fully briefed on all the detail, and to have an opportunity to debate some of the decisions that have been made. I am not 100 percent sure about them, and I think that when we go through the detail of this bill and get some feedback from the Minister of Finance, we will find that some issues need to be talked through a little bit more than this bill and this process allow.

The regulatory impact statement goes on to state: “The decision was made not to consult proactively on the proposals with the public. This is due to: officials already having a reasonable amount of information about stakeholder views from regular interactions (summarised in Annex 3).” I have now had an opportunity to read annex 3, which I had not had when I spoke in the second reading debate. Annex 3 creates further difficulty for me because it talks about some of the feedback that the Government has, in fact, had in respect of concerns raised by both the banks and the non-bank sector. I want to highlight a couple of these concerns, and I think it is important that the Minister responds to them.

The first is the questions around distortions that were being created by the deposit guarantee scheme. My colleague the Hon David Parker raised those concerns in his second reading contribution. The regulatory impact statement states that “many non-banks are finding it difficult to attract deposits after the end of the guarantee period (creating a ‘wall’ of maturity). A business grouping has expressed concerns about the distortions to financial markets created by the DGS.” When the Government responds to this, Treasury says: “The extended DGS is designed to minimise economic distortions by having much more risk sensitive pricing. It is designed with a definite end date,”—it has gone from 2010 to 2011, so not much has changed except for the actual date; the definite end date was already there—“to help reduce the risk of another wall of maturities forming before the end of the guarantee period.” This means that there will be no lending after 2011 from the mezzanine finance sector. That alarms me, because essentially the Government is admitting that this bill will simply delay the problem.

I am not opposed to the idea of extending the deposit guarantee on the basis that it matches with that of Australia. I was also interested to see that the banks do not actually regard themselves as at any risk now from flight to Australia, which is very interesting, because that certainly was not the view at the time that the original scheme was put into place. There was a real concern that if we did not put a scheme into place—with, unfortunately, the lack of sophistication in our investing market—people would be persuaded to put their deposits over the Tasman in order to ensure that they were covered by a deposit guarantee. This is certainly a particular concern.

I stand to support the Crown Retail Deposit Guarantee Scheme Bill. There were two reasons for the scheme being undertaken by the Labour Government in October 2008. The one that most people have talked about was the desire to maintain liquidity at a time of immense tightness in global cash flows. I am aware that the BNZ was very close to implementing its contingency strategy on how to operate without access to foreign funds. We saw what happened when there was a rush on the funds of finance companies—they collapsed. As my colleagues have spoken about, the first charge of the Labour Government was to provide a Government guarantee to depositors to ensure that there would not be a run on the funds of banks.

As the Hon David Parker said, had there been a rush on the funds of banks similar to the rush on the funds of finance companies, the New Zealand economy would have been in grave danger of experiencing the sort of collapse we had seen overseas, in Europe and in the United States, or perhaps of being in even worse shape than that. Of course, the mess in the UK ended up costing the British Government significant amounts of money, and it was forced for all intents and purposes to nationalise large chunks of the banking sector. The whole argument about banks being too big to fail was belied by the fact that the UK Government nationalised much of the banking sector, at a huge cost. And let us not talk about the situation facing US investors.

We on this side of the House understand the importance of a strong banking sector. It annoys me a little bit when I hear members of the National Government standing over there preach at us as if we do not know anything about finance, we do not know anything about the economy, and we do not know anything about the banking sector. After all, the Labour Government is the only Government in two generations to lower the corporate tax rate. I would say that the small to medium business sector would say the Labour Government was the friend of small to medium businesses.

💬 Hon Darren Hughes: That party voted against it.

That is dead right. Mr Coleman actually voted against dropping the corporate tax rate. It was amazing.

The reason that the Labour Government introduced the scheme, and, more specifically, that Dr Michael Cullen worked all of a Sunday evening to get it up and running within 24 hours, was to shore up deposits within the banks to match what was happening in the Australian sector, and therefore to prevent a possible run on funds and a collapse of the New Zealand banking sector. We understand that. But there was also another reason that the Crown Retail Deposit Guarantee Scheme was put in place, and it seems that the National members are totally ignoring it. They have not mentioned it once. I will quote Dr Cullen: “The government is offering this deposit guarantee to address the current situation of international financial market turbulence and it will be for a two-year term in the first instance. This will give time to see how well international financial markets stabilise in the months ahead.” That reinforces what I was talking about—shoring up the banking system. But he went on to say: “The deposit guarantee is designed to give assurance to New Zealand depositors. The New Zealand banking system remains sound. We want to ensure that ordinary New Zealanders feel that their deposits are safe in the current uncertain international financial market conditions.” I think we must not forget that the other reason why the retail deposit guarantee scheme was set up was to protect ordinary New Zealanders from losing their hard-earned funds. That is one of the reasons why I support this bill. I would hate to see ordinary New Zealanders, having lost their funds in the finance companies, lose their funds in the banks. This bill is about providing confidence, not only to the international credit sector but also to ordinary mum and dad, grandma and grandpa Kiwis.

When it comes to the matter of urgency, I hear what the National members have said, but I just do not buy it. The National members, and more specifically Ms Amy Adams and Mr Craig Foss, say that our not enacting this bill now might have a distortionary effect on the financial markets, or, more specifically, the banking sector. So what we have here is, on one side, the rule of law and democracy, which Labour members support, where the bill would be taken through the full select committee process, versus the banking sector. What does one favour? The National Government has said it favours the banking sector. It comes before democracy, before the right of the people—and it is a fundamental right of our democratic system—to stand before their elected parliamentarians to present submissions on what should happen to the scheme. It is 13 months away before the scheme expires. Ms Amy Adams said we are debating the bill under urgency because people demand certainty. If it is so important—

I move, That the question be now put.

I note that the Minister in the chair, the Hon Bill English, has yet to respond to any of the questions that have been raised by the Opposition in respect of a bill that is not going to a select committee, and that the Government sees as a very important bill, yet we already have closure motions being put forward by National members. I suggest, Mr Chairperson, that you should not listen to those closure motions for a while yet.

I have a question to ask the Minister in the chair about how he plans to get New Zealand out of these guarantees. Although the regulatory impact statement makes the point that this is necessary and that it seeks to minimise distortions in credit markets, there is no doubt that it is distortionary and there is no doubt that it inhibits the operation of parts of the market. There is no doubt that it advantages some institutions relative to others, and there is no doubt that it creates a distortion in that finance companies that are higher risk than banks are none the less guaranteed. Although the payment that they have to make for the guarantee facility might, to some extent, vary to take account of that, I suspect that we have seen a flattening of rates in New Zealand as a consequence of the ability of some finance companies to avail themselves of the Crown guarantee. I think it is important that we see a way forward when there is a plan for either a permanent guarantee scheme, which would be very difficult in my view, or we have to transition away from any guarantee scheme.

I say to the Minister that we currently have a scheme that applies only to debt securities. Debt securities have a legislative definition that is, to a certain extent, like all definitions, a little bit arbitrary. The arbitrariness can be illustrated from the difference between something that is nominally a debt security and something that is nominally a collective investment. As I have mentioned previously, investors in mortgage-based contributory mortgages or mortgage-based group investment funds or unit trusts cannot avail themselves of this guarantee scheme. That has led, effectively, to a rush on what are very secure forms of lending. They are mortgage-backed securities and they are far less risky than finance company investments, on the whole. Yet because of the way in which there has to be a boundary around a guarantee scheme such as this one, which is found in Part 1 in the definition and is limited to debt securities, and which does not refer to participatory securities and collective investment schemes, effectively, through this definition we are limiting the guarantee to finance companies, banks, and building societies, but investments of money that are giving people a trust interest in a first mortgage are not covered by the guarantee scheme. As a consequence, that important part of the market—less important in New Zealand than it is in Australia, but none the less an important part even in New Zealand—is shrinking. Who is that to the relative advantage of? It is to the relative disadvantage of New Zealand because of the ownership structure of our major financial institutions. It is mainly to the advantage of the banking sector. We know that our banking sector is predominantly overseas owned. Therefore, we see further concentration of profits into the non - New Zealand - owned part of the banking sector, to the disadvantage of New Zealand - owned parts of the sector. I ask the Minister to take a call to give some understanding to the Committee as to how, when we come to the end of the extended period of the scheme, he sees New Zealand transitioning away from the scheme.

I will also talk a little bit about the proposed fee structure. It is relevant to Part 1 because the fee structure arises under the guarantee scheme and the guarantee funding facility. The terms of those facilities include fees that are charged to the recipient of the guarantee. My second question for the Minister relates to the breakdown of fees. I acknowledge that the Minister has a very difficult task and that he wants to see that the guarantee properly takes into account the relative risk of different investments. It is appropriate that riskier investments pay a higher fee for the guarantee, because it is more likely that the guarantee will be called upon. For that reason I can see why finance companies should have a higher fee charged than a stable bank, but unfortunately the metric that is chosen for the investment of fees is Standard and Poor’s - type ratings. The higher ratings are available only to very large institutions. We know that the only very large institutions in New Zealand are overseas banks. All of the smaller institutions that cannot get that high AA rating by virtue of their size, including some very secure building societies, smaller institutions like some of our smaller building societies, and some of our better finance companies, will never get a very high rating. As a consequence they will always be paying a higher guarantee fee.

I ask the Minister to justify how that situation is in New Zealand’s interest. Although we have to have regard to relative risk, Standard and Poor’s ratings—which internationally have been found wanting in the last year or two, at least in some of the markets that have been rated by the agencies—are a too simplistic way to look at it. We do not want to have a system that further entrenches the existing advantages of the major banks, to the detriment of the New Zealand economy, because we know that for those major banks all of their profits are repatriated overseas, except to the extent that they reinvest in expansion in their New Zealand business. There are a lot of profits, which are a large contributor to our current account deficit and we do not want to see that contribution to our current account deficit grow. It concerns me that the way in which this fee structure is proposed will further entrench the advantages of banks and disadvantage the smaller New Zealand institutions, including our smaller banks like SBS and also the Taranaki savings bank. I would like to think that the fee structure could reflect the fact that although under Standard and Poor’s rating terms those entities are not seen to be as stable, in practice I think they are no more at risk than the larger banking institutions. Indeed, those larger banking institutions may well lend to higher multiples of equity than some of the smaller banks. I hope the Minister takes a call to respond to those two points.

I move, That the question be now put.

I am disappointed that the Minister of Finance has not responded to the questions we have put to him. I think it is important that he responds. The question that I really have been looking for an answer to is why we cannot have a limited select committee process for the Crown Retail Deposit Guarantee Scheme Bill. That was recommended by Treasury in the regulatory impact statement. It is not often that Treasury recommends something and the Government simply turns a blind eye to it, unless there is a reason. But we have no reason; nothing has been presented to us by any of the Government members who have been asked to get up and speak on that particular matter. For them to seek closure motions after a very short debate, and to have no response at all from the Minister, is quite strange. I am surprised because I thought this Minister was capable of responding to the questions.

I will go back to the details about the consultation, which are in annex 3 of the regulatory impact statement. Banks raised their concern about the extension of the scheme, saying there was “mixed support for extending the Scheme to match the Australian scheme … Banks tend to think it is not necessary for them and risk of depositor flight to Australia is low. Finance companies”—surprise, surprise—“tend to support extension. Some Credit Unions have chosen not to opt into the DGS because they have a relatively sticky depositor base.” That is obvious. The regulatory impact statement continues: “Entities operating outside of the DGS (e.g. fund managers) are concerned about the competitive disadvantage that the Crown guarantee puts them at.” That is exactly the point that has been raised by the Hon David Parker and must be answered in this Committee tonight as the bill progresses under urgency.

I raise another issue that was also raised in the various engagements with stakeholders, as Treasury and the Reserve Bank have described them. A workers union and an economic thinktank—they are not described by name—have said that this bill is an opportunity to attach conditions on institutions’ behaviour for the extension. The two particular examples that were raised with the officials were employment protection and mortgage holiday provisions. I can understand why unions and any economic thinktank worth its salt would want employment protection at a time like this, and also that mortgage holiday provisions are absolutely vital to enable some people to survive the first redundancy their family will have experienced in a lifetime. That genuine concern has been expressed to me as a constituency MP, and I am sure constituency MPs on the other side of the Chamber will know exactly what I am talking about.

I will read the officials’ response to that suggestion. They said: “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.” That may well be in terms of the direction the Government wants to point some of the non-bank sector to, but when we are talking about the banks, I understand very well why certain unions would be pushing for a removal of the risk of outsourcing to other countries. The banking sector has seen a lot of that. If the Government is to provide this guarantee, we are talking about the taxpayers of New Zealand basically underwriting performance in this regard. It is important that we have a bit of a debate around these conditions.

The mortgage holiday provisions are another issue. As I say, that issue is not even responded to by the officials, which is a bit unfortunate because we are trying to protect depositors over the period of uncertainty that has been created by the global economic environment. That is exactly what the banks would be protecting by giving a mortgage repayment holiday on favourable terms. That in itself is a protection that could be offered during this period of economic uncertainty. It is unfortunate that we have not really been given an opportunity to debate these matters. That is what a short time—1 or 2 days—at a select committee would enable us to do.

I will talk about some of the clauses in the regulatory impact statement of the Crown Retail Deposit Guarantee Scheme Bill. I will also pose a couple of questions in the next 5 minutes to the Minister of Finance, in the hope that he will take a call and answer these questions. As has been mentioned, I think, this is a very important bill, and it has fiscal implications. It has wide-ranging investor and saver implications, and I think all of New Zealand would like to hear what the Minister of Finance has to say on those things.

As my colleague the Hon David Cunliffe mentioned, the amount of the fees collected under the current fee structure to date is approximately $87.4 million per annum. Imagine, I ask my colleagues, how much of that $87.4 million collected in fees for the retail guarantee scheme could have gone to the adult and community education scheme. If the Government put $13 million into adult and community education, it would not be in the bother it is in at the moment. But anyway, that is another story. One thing I will elaborate on, which the regulatory impact statement talks about—

The CHAIRPERSON (Eric Roy): A thoroughly different story.

It is another story, but it is a very important story, Mr Chairperson. One day we will talk about that. I found the regulatory impact statement on the Internet. It is not in the bill. It is not in the bill at all. If we want to know what this bill is about, we have to go to the Internet, which I do not think is a great process.

💬 Hon Lianne Dalziel: It would be all right if we had a select committee hearing.

Well, we should have a select committee hearing, really, should we not? I will elaborate on a couple of points that my colleague the Hon David Parker talked about, which relate to economic distortions. I will read a couple of things in this regulatory impact statement. “Economic distortions include encouraging guaranteed depositors and deposit taking institutions to make riskier investment decisions since the gains from these riskier decisions will be accrued by the depositors and deposit taking institutions, while potential losses to depositors (of up to $1 million per depositor per institution) will be borne by the taxpayer. This is referred to as a ‘moral hazard’ problem. An example of this ‘moral hazard’ problem within the current DGS is that finance companies, which tend to be involved in higher-risk and higher-return lending, have grown their deposit books by approximately $880 million (19%) since the guarantee was introduced in October 2008. Before the guarantee, the deposit books of many finance companies were shrinking. In some cases, finance companies have used retail funding to replace their bank funding lines.” I think many New Zealanders would find this rather abhorrent, considering how many ordinary Kiwis have lost their life savings through the mismanagement of depositors’ money.

Let us look at the objectives in the regulatory impact statement. “The Government seeks a stable and economically efficient financial sector that supports growth in economic activity by minimising economic distortions while not exposing the Crown (and thus, taxpayers) to undue fiscal costs or risks.” I think we all agree with that. “This requires a diversity of innovative financial service providers that are prudent in their lending decisions, can adapt to changing circumstances, and investors in these institutions that understand the risks involved and can price these risks accordingly. This reduces moral hazard, ensuring well-priced credit markets. Ensuring a viable non-bank sector in the future is important to this end, particularly as it provides competitive pressures upon banks and provides services in areas not otherwise provided.” This is what I talked about in my second reading speech when I discussed the differentiation between savers and investors. The vast majority of Kiwis who lost their money in finance companies were actually savers. They trusted Colin Meads, Richard Long, and all those characters—

💬 Hon Lianne Dalziel: Sir Colin Meads.

—sorry, Sir Colin Meads—who said: “Invest in this.” Ma and pa, who watched Colin Meads play his 55 tests, said: “He knows what he is talking about. I will put my money”—

💬 Amy Adams: Solid as!

Good one! They said: “I will put my money in this.” The savers did that. I argue that the vast majority of Kiwis who lost their money were savers, but I now contend that many people who put their money in finance companies—we are talking about $880 million worth of funds that have been invested, which is an increase of 19 percent—are actually investors. They are not putting their money in there to save; they are putting their money there because they know it is under a Government guarantee.

I want to know how the Government and the Minister of Finance believe that the Government will be able to extricate itself from the situation it has found itself in, without a further run on non-bank funds, like we saw with the collapse of the finance sector. It could be that once the Government guarantee is over, people will pull their money out, because it is a risky investment, and they will put it back into a bank. That is a big concern, and it invites the question: will we be back here in a year again debating under urgency an amendment to the Crown Retail Deposit Guarantee Scheme Act called the Crown Retail Deposit Guarantee Scheme Amendment Bill of 2010?

There have been a couple of questions. Firstly, there has been the question of why the Crown Retail Deposit Guarantee Scheme Bill is going through the House in this form. There is a simple reason for that. It is the need for maximum certainty, particularly in respect of listed entities and any institutions that may be under financial pressure currently. A judgment was made, and I do not pretend that it is any more than a judgment, that the process we are using is the best way to ensure that certainty.

With regard to consultation, through the mechanism of the Reserve Bank consultation with non-bank deposit takers over the new regulatory structure—actually, there was a significant discussion with the sector about this particular issue over time—it became quite apparent that with only a bit more than a year to go until the end of the existing guarantee, it was quite important for the Government to move with some speed to create certainty. Members might see in the regulatory impact statement a graph that shows the build-up of deposits against the end date of the guarantee. That was clearly going to become a pressure of instability in the sector.

On balance, the Government made the judgment that it should get on with making a decision about the extension of the guarantee, and to execute that extension as quickly as is reasonable. The Government appreciates the support of Parliament in doing that.

I will take the opportunity to respond to a couple of things the Minister said, and then to do a wrap on some of the macro and debt issues that are covered in Part 1 under the term “debt security”. In respect of the first matter, the Minister said in response to the Opposition that the reason we are in urgency and dispensing with any select committee process is to maximise certainty. There are two aspects of certainty. The first is in respect of timing, and the other is certainty in respect of detail. It is certainly not as adequate for Parliament to debate this under urgency with no recourse to a select committee, with no opportunity to hear the concerns of ordinary members of the public. They are the depositors, as Mr Nash said, who have, in many cases, lost their life-savings through failures in the non-bank finance sector. The questions that may be raised by the institutions themselves in public session, which may or may not be the same as they have raised in private with the Reserve Bank, deserve a fair hearing. As I said in my earlier intervention, this Government is getting a bit of a name for sham consultation processes, and it is a shame that this should be added to the list.

The Minister of Finance mentioned consultation by the Reserve Bank. The issue with that is that the public cannot see it. The public is not exposed to the arguments for and against. The process is opaque. It is behind closed doors. The public is not even fully aware of what tools the Reserve Bank has at its disposal, or the adequacy of those tools. But, having said that, the Opposition supports this bill, because on balance, notwithstanding those weaknesses, it is important that we extend the scheme under controlled circumstances to match or approximately match the Australian scheme. Otherwise, there could be a flow of funds potentially from institutions here to institutions across the Tasman that are covered by a deposit guarantee when ours are not.

One aspect that has been debated in the Committee stage is the voluntary nature of the scheme, and in particular the de-linking of the retail from the wholesale guarantee scheme. So it is instructive on page 10 of the regulatory impact statement to see these beautifully crafted words of bureaucratise: “The economic and stability pros and cons of delinking the retail and wholesale scheme are finely balanced, including a possible variant of making it compulsory for some groups only, (e.g. banks).” Well, is that not what the Opposition has been saying? If those banks, the self-touted pillars of security that the member opposite Amy Adams was keen to propound, are providing 90 percent - plus of the breadth of assets that spreads risk, and 90 percent - plus, because of their size, of the revenue streams to the Crown, is the Crown not, paradoxically, exposing itself to a higher average level of risk if it allows them to opt out?

In the end, it brings us to the bottom line. This first part is about debt security. The debt we are talking about is private debt. It is overwhelmingly bank debt—90 percent - plus bank debt. How much? New Zealand’s GDP is around $140 billion to $150 billion. New Zealand’s gross debt is 140 percent of our gross domestic product. That is 140 percent, in gross terms, of our gross domestic product, and it is rising at 10 percent per annum—that is 150 percent of gross domestic product in current trends; a year from now 160 percent, if one rolls out 2 years. At what level does that become an unsustainable level of national debt? Compare that with the Crown’s balance sheet. The Government was, perhaps rightly, concerned to ensure that it did not get out of hand. We would, too, if we were on the Treasury benches. But it is not the main game in town, nor is it the only responsibility of the Government of the day. The Government has its handle on the country’s most potent economic levers. The public elects a Government to manage the country’s book, not just the Government’s book. Therein lay the weakness of this year’s Budget. It had much to say about the Government’s debt, but nothing at all to say about the country’s debt, which dwarfs it at 140 percent of GDP. Yes, let us shrink it, I say to the member opposite, Craig Foss. It is 140 percent of GDP—and the Government’s debt is how much? In net terms it was zero. It was single-digit percents, post-crash.

I move, That the question be now put.