Crown Retail Deposit Guarantee Scheme Bill

Part 2 of the Crown Retail Deposit Guarantee Scheme Bill provides for the powers that allow the Minister to specify types of entities and criteria. It will allow the Minister of Finance to give a guarantee according to those criteria. It requires the Crown to assume creditors’ rights and sets out the responsibilities of payment in respect of guarantees. This is the meat in terms of the operations of the bill, and in that regard it is appropriate for us to turn to the relevant assessment in the regulatory impact statement of the extension options.

Three broad options were considered. One was a continuation of the status quo, which we have described as the cold turkey option. It is the option that the scheme will terminate in October 2010. As one member opposite rightly pointed out, the reason for having an early decision—although we believe the process should not have been as truncated as this—is to allow institutions to manage their books. The data is that about one-third to 40 percent of the debt is for a period shorter than 1 year in duration. About another third is for a period of between 1 year and 2 years, and that third is now within the window of the closure of the current scheme. So it is appropriate that we are considering now the future of the scheme.

The arguments in favour of allowing the scheme to go cold turkey at that point were that we would remove so-called distortions from the market, whereby the risk to investors is masked because of the guarantee scheme—that the lame were covered as much as the only partly lame. The argument was put up that by having banks and non-bank institutions with different credit-ratings put together—albeit at slightly different interest rates—the risk and the return were blended, and that that was opaque to the market. So that was the first argument. The second argument for going cold turkey was that it was the fastest way to reduce the exposure to risk of the Crown.

If the Government is to be believed when it says the recession is over, then it would seem sensible for it, following its own philosophy, to allow the banking sector to adjust to the new post-recession era by removing these guarantees altogether. However, it has decided not to do that. The reasons for extending the scheme by one year are, firstly, to roughly match the timing of the extension to the duration of the Australian scheme, thereby preventing a flow of funds from New Zealand institutions to those across the Ditch, and, secondly, to ease the sector into a post-guarantee era and to more gently match the withdrawal of protection to what the sector may consider to be a slow and, perhaps, fragile recovery.

We believe that the Government has been trying to have it both ways on the rhetoric of this recession. At the same time that the Minister of Finance has been saying the Government should never waste a good recession, and that it should prepare for privatisation and for other radical measures, like raising GST as soon as he can get the working-group to report on that—let us not waste a good crisis—he has also been telling us that gardens are growing, the green shoots are up, the sun is out, spring is here, and the worst has passed. Treasury has said it will be all hunky-dory, with only 7.5 percent of people unemployed. That is only double what the figure was before the election! That is only 2 people losing their job, their identity, their family’s livelihood, where it was one before the election—so there are serious, serious consequences.

That was the argument for a slower return to a post-guarantee world, and, on balance, that is what the Government has gone with. We believe that it was the right decision. We believe that it is right to match our scheme with the Australian scheme, and we think it is right to give the sector some time to adjust. We also think it is fair enough to have reasonably tight criteria, so that we do not mask undue risk. Although we acknowledge that it is harder for small companies to get credit ratings, we believe that there has to be some relatively objective measure of creditworthiness. That is kind of enough of a shared zone for us to vote for the bill.

But we do have major reservations, which show up in this part again, about the role of the banks. It is our considered view that it would be more secure for the Crown, in terms of the spread of risk and of less exposure to the Crown in terms of fiscal revenue streams, if the banking sector were expected to be included in both the retail and the wholesale schemes. In taking both together, the risk, while being partly masked, is bundled in a way that we believe adds more security to the system as a whole and protects the Crown from a revenue loss, because the income stream is greater. As we said in a previous intervention, the magnitude of potential loss is in the order of 95 percent bank and 5 percent non-bank. That really is a huge, huge difference. So by allowing the banks to opt out, the Government is concentrating the risk on the part of some of the smallest entities, and vastly reducing what could be described as the premiums that are paid for that insurance.

But at the end of the day the Opposition believes that mum and dad investors need to be protected. There have been enough families ruined, and, sadly, tragically, there have been too many suicides by ordinary New Zealanders whose lifesavings have been lost due to the inappropriate management of risk and companies being caught by the international recession. We certainly want to send our condolences to any families that have been so affected. It is therefore of paramount importance to us that New Zealanders have the protection of a scheme like this throughout the duration of the recession and the early phases of whatever recovery is coming, and that is a key reason why we are supporting this bill.

The technical complexity arises in Part 2, and my colleague the Hon Lianne Dalziel put very eloquently that we think more consultation here would have been appropriate. The Minister has said it was a judgment call and the Government thought it would get the bill through. The Opposition’s point of view is that even a 1-week process to allow a select committee to question officials and get matters on the public record would have been very, very useful, as we look back on this experiment, if you like, in years to come.

But the bottom line is that there is no doubt that it is worth having a statutory power for the Minister of Finance to operate under, and it is recognised that the only reason why that did not occur prior to the last election was that Parliament had been prorogued and we were in an extraordinary situation. So no one wants to go back to the dark days of September-October. We do want to regularise this matter, and the Labour Party will be supporting this part of the bill. Thank you, Mr Chairman.

I acknowledge the previous speaker, the Hon David Cunliffe—

💬 Craig Foss: The “Prince of Ponsonby”.

—the “Prince of Ponsonby”, of course—and the points he raised about aligning our laws with those of our partner, Australia. The Minister of Finance alluded to the reason we are pushing this bill through under urgency. There is a sense of urgency out in the financial industry. When one goes out into the industry—and does not hold bogus inquiries in Parliament—one realises that finance companies are hurting. It is true that 95 percent of the market is banks and 5 percent is non-banks, but by making that statement my learned colleague ignores the important role that non-bank finance companies play within the finance market in New Zealand, particularly for those in rural areas and for those who are not able to access capital from the big banks. Those non-bank finance companies play a crucial role for those people, and that is why this legislation is critical to the continuation of that role.

The transition, as Mr Cunliffe alluded to, will be a slow one. The deadline will be will be December 2011. That date dovetails well with the timing of the next election, given that the action of the previous Government, in October 2008, to put in place the original scheme was done with a little bit of haste over one weekend, as Mr Nash mentioned.

I turn back to the bill. One of the important clauses is clause 6(2), which states: “The minister may give the guarantee on any terms and conditions that the Minister thinks fit.” That discretion is important, given that the criteria for the Minister to grant it will be a public-interest test. What was also referred to was the fact that people have lost their lives. I have to say that it is really poor taste to mention such people within the realms of the discussion of this bill.

It is poor taste because families have suffered, and to use it for political grandstanding and political capital is just a bit out of line. But that is OK, because a finance company inquiry is being conducted by the Commerce Committee, and I applaud the members who have pushed for it, particularly my colleague John Boscawen, and the chair of the Commerce Committee, the Hon Lianne Dalziel, who has steered a good course in respect of the terms of reference for the inquiry. It will cover a number of aspects, which some people have alluded to tonight. Some people have referred to the nature of moratoria and a corporate trustee model, and all that work will be reviewed in due course under the terms of reference for that inquiry.

So this bill is about the creditworthiness of the finance companies—we will not touch on the banks. It is important that finance companies are creditworthy, and to say that a company that has, say, a B or a BB credit-rating is a company that is of high creditworthiness. Obviously some members across the aisle will misunderstand the rating system, because those types of companies are non-investment grade. They carry higher risks than the banking sector, and, appropriately, they should be priced for carrying that risk. I concur with the Minister and my colleagues in supporting this bill.

I will make one point with regard to Sam’s speech because he may have got the wrong end of the stick.

💬 Moana Mackey: Probably; I think he is on council time at the moment.

That is all right. I brought up the fact that people were suffering. The reason I brought up that fact is that Michael Cullen—the previous Minister of Finance, who put the Crown Retail Deposit Guarantee Scheme Bill into place—said that one of the main reasons that the previous Government did this, aside from shoring up the financial sector, was to guarantee ordinary New Zealanders would not be put under the financial and emotional stress that they had been put under due to the collapse of 40-odd finance companies over the preceding 2 years or so. The financial and emotional hardship of ordinary New Zealanders was not brought up in the debate to make a political point, at all; it was quite the opposite. It was brought up to say there are two sides to this bill: there is the fiscal or financial side and there is the social side. The social side is just as important as the financial side. So I correct Sam on that: there was no disrespect whatsoever; it was brought up to emphasise two points.

I make another point: when the Minister of Finance stood up to take a call on Part 1, I was very hopeful that he would answer two questions that the Labour team had posed to him earlier in the Committee stage. The first was how the Government was going to extract itself from this scheme without once again inherently damaging the non-bank centre through a run on deposits by investors in so-called high-risk funds, which are currently under guarantee. As mentioned, the majority of people who I believe are new investors in financial companies—the $880 million worth of new funds in the finance companies—are investors, not savers. I have a real concern that, once this scheme runs out, people will withdraw their funds from the non-bank sector and therefore create another financial tsunami, which may affect the finance companies.

The second question that I had hoped the Minister would answer is how long the Government will continue with this guarantee. If we look at the regulatory impact statement again, we see that it states: “Stability is aided to the extent that moral hazard is reduced, thus decreasing the likelihood of more failure in the long run through imprudent lending.” I suppose my concern is that once the market, investors, and savers—and banks, for that matter—become used to such a scheme, then extracting ourselves from the scheme will become incredibly difficult. In fact, we may find—and this is a risk—that overseas lenders will demand that such a scheme remains in place, otherwise the cost of overseas funds will skyrocket, having an adverse effect upon homeowners, the farming sector, and the business sector, as overseas lenders price risk accordingly. At the moment the international sector prices risk by looking at the risk of funds falling over. At the moment there is no risk that any funds in any institution that is in the Government guarantee scheme will fall over. How will we extract ourselves from this scheme without the risk premium on overseas funds increasing? I know we are talking about depositors here, but it still has implications across the whole banking sector. Unfortunately for the vast majority of New Zealanders, for the Labour Opposition, and, I am sure, for the Minister’s frustrated National colleagues, he did not talk about this issue, at all.

Another thing that came up in the regulatory impact statement was the statement—and this surprised me—“Letting the DGS cease in October 2010 would avoid the direct costs associated with the Treasury continuing to operate the DGS for an additional period, but forgo the fees currently collected.” The reason I found that slightly surprising was that the fees are there to mitigate risk to a certain extent, but not to a great extent. I hope Treasury is not varying the scheme simply because it can collect a whole lot of money. There are many reasons for this scheme, and one of the very, very small reasons is the money it can collect. But, as mentioned, Treasury has collected over $80 million from this so far. Maybe it should give $13 million back to the adult and community education sector—only $13 million!

That is OK; let us look at Part 2, which contains some other clauses we can talk about that, for retail depositors, are just as important as the adult and community sector is to those who are taking night classes.

In regard to Part 2 of the Crown Retail Deposit Guarantee Scheme Bill, I will touch on a point that the previous speaker made. The previous speaker from the Labour Party was talking about a so-called risk premium. Basically he was saying that international investors will require the New Zealand Government to maintain the scheme, and that to get out of the scheme would be very expensive for our Government and our country. Well, that shows the level of knowledge of the financial system that the Labour members have. Maybe I was wrong. Maybe Labour members do need an inquiry, so that they can learn what is going on in the financial system. Maybe it should not have been an inquiry. Maybe it should have been an educational trip for the Labour members. Even better than that, maybe they needed to create a forum where they could discuss things, come up with a policy agenda, and write up a series of reports to file amongst the Labour Party so that they could be framed and members could say that they are some of the great leaders of the Labour Party, like Michael Cullen. He was known for doing a series of reports so that Labour members could be comfortable with some paper behind them. Unless they have paper behind them, Labour members do not care. They do not understand—

💬 Stuart Nash: I raise a point of order, Mr Chairperson. We are debating, if I am correct—and correct me if I am wrong—Part 2 of the Crown Retail Deposit Guarantee Scheme Bill, and so far all I have heard is Mr Bennett talk to those beside him. He keeps looking in their direction, but I have not heard one word at all about Part 2 of this bill.

The CHAIRPERSON (Eric Roy): I think the point is well made, but I could have directed it to some of the member’s colleagues at odd times, as well. By and large they have been very good, but there have been blemishes. I ask Mr Bennett to debate Part 2.

I think that is fine leadership from our Committee Chair, who has shown a good understanding of what both parties have been saying.

In going back to the Crown Retail Deposit Guarantee Scheme Bill, I point out that the previous speaker talked about a risk premium. Let us put it this way. If anybody had any idea of the financial system, especially the Australasian financial system, he or she would understand that in Australia and New Zealand the banks are trying to get out of retail deposit guarantee schemes. The banks in both New Zealand and Australia are in a situation now where they believe they have weathered the worst of the storm, and therefore they do not think they need this kind of legislation. That is the reality of the situation. The Labour members needed that banking inquiry so that someone could tell them that, but most other people would have found that information if they had been aware of the market and taken due diligence, rather than having to argue it through the debate on the Crown Retail Deposit Guarantee Scheme as we have tonight.

When we look at Part 2, we see that it essentially goes to the heart of the matter. It talks about what the bill entails in the sense of the Minister’s ability to specify the types of entity and criteria, the Minister’s ability to give a guarantee, recovery of money, the assumption of creditors’ rights, and payments in respect of the guarantee. The heart of this legislation is in Part 2. It contains the components that we have been talking about in regard to the Minister of Finance and the Crown Retail Deposit Guarantee Scheme.

What has happened in the financial situation in New Zealand in the last few months, and the situation is reflected by our Australian neighbour, is that due to the stability afforded to the financial system in this region through the Australian banks performing extremely well, the need for this guarantee scheme has, in essence, waned. This legislation is a very good sign for the New Zealand economy, because it shows that we do not need the props of that guarantee scheme as much as we did 9 to 12 months ago. It shows the incredible stewardship of the economy by this Government, which has managed to make the right decisions through its budgetary process, and has continued through that process to give New Zealand and international investors a sense of security about the financial leadership of New Zealand and the security of our financial markets and our banking system.

It is a good sign for New Zealand that we are able to do this. The Labour members are voting for it because they know it is a good sign. They should be applauding the National Government for making this good sign a reality within such a short period of time. But they cannot bring themselves to do that, and they have to hide behind banking inquiries and suchlike to try to console themselves about their financial woes. The guarantee scheme was started by the previous Government at the end of its political term, but it was a bit of a rush job, and it was done only because the Australians did it.

I have been looking at the questions and answers that Treasury has released on the Crown Retail Deposit Guarantee Scheme Bill, and the concern I have is that they do not resolve one of the question marks I have over the whole thing. We have been talking about how urgent this legislation is, and how it must be dealt with under urgency. We are told on the Treasury website that there needs to be certainty so that people can act with certainty as soon as possible: “We want to give depositors and institutions certainty as soon as possible. Approvals for institutions to participate in the extended scheme are expected to begin from late September to early October this year.” So obviously this legislation is passed now, and by the end of the month or early next month we are into applications for approvals being lodged by institutions who want to participate in the extended scheme. The advice then states that details of institutions participating in the extended Crown retail deposit guarantee scheme will be published on the Treasury website. Essentially this is an answer to a question that a depositor or investor might be asking, such as: “Where do I find out if my deposits and investments are guaranteed now? How and when will I know if the Crown guarantee still covers my deposits after the scheme is extended?”.

One would imagine that we are rushing under urgency because there will be a relatively short period of time when applications for the extensions will be made, so that everyone can know whether their particular institution will be in the scheme. In fact, Amy Adams told the Committee that we had to deal with the bill under urgency because we were so stupid on this side of the Chamber that we did not realise that people made decisions a year in advance. But guess when applications for extensions close? If an institution does not have a credit rating yet, when is the latest that it can apply for the extended scheme? When do members think that might be?

💬 Paul Quinn: Who are you looking at?

I am running a little thing over here. Applications for extension to the scheme should be made by 12 October 2010! So the legislation does not have to be passed immediately at all. In fact, there is not the certainty for people who are currently—

💬 Aaron Gilmore: Read the rules for the non-banking sector.

💬 Hon Darren Hughes: The member wrote them!

I think that he actually invented the finance sector. We never had a single finance company in this country until Aaron Gilmore thought of it! It is unbelievable. What that man has not contributed to his nation is not worth speaking about, but there we go.

The point I make is that it is all very well for the Government to say that this bill has to be introduced and passed urgently so that there is certainty, but in actual fact the real sector that wants this is not the banks—the banks do not want it all—it is the finance companies and the people who are making decisions as to whether they are going to reinvest in finance companies. They want to know when that will be, and that is what the wind-down, as the Government has described it, is all about. But they do not have to decide whether they are going into this until 12 October 2010.

Members opposite have said that the pricing of risk around the cost of entering this extension has been more appropriately aligned by the reference to the BB rating. I think that the members who have made those comments do not know how the current system is priced. There are two price ranges, one leading up to the BB rating and one for those who have improved to the BB rating and beyond. So to tie it back to the BB rating—and I agree with the Government that it is the bare minimum in respect of extending the deposit guarantee scheme—with the introduction of the requirements to have credit ratings under the new non-bank deposit taking legislation makes good sense. But I think members opposite are assuming that there was nothing in the previous scheme that tried to encourage these non-bank deposit taking entities to move to a credit-rating situation before they were legally required to do so in order to be registered under the Reserve Bank legislation.

I think that the Minister should respond to these questions, but if nobody else wants to have a chat about this I will continue. It is a serious issue that I would like the Minister to respond to, because everything hangs on the fact that we are not having any element of select committee input. Even the officials briefing for 1 to 2 days that Treasury recommended should happen is not happening, and the reason we were given was that this all had to be done so urgently. We have just shown that the one sector that is relying on this measure more than any other sector does not have to have its application in until 12 October 2010.

The second thing I wanted to focus on again comes from the regulatory impact statement. I have to say that finding out that the regulatory impact statement was not in the bill and having to go and download it over the tea break was not helpful. There is an issue in relation to the changes that the Government will make to the conditions around the guarantee, and the Minister may like to take the opportunity to address this. I have read the changes that Treasury is now recommending through the regulatory impact statement, and I assume that they have been signed off by Cabinet, but it is difficult to tell. Paragraph 63 of the regulatory impact statement talks about “More active management levers:” and “Redefining trigger events for default so institutions entering statutory management would not necessarily be in default.” and I think that is an interesting expansion of the scheme. It also refers to the “Change of control authorisation requirement;” and that is essentially looking at the risk of a buyer entering the market with the aim of using the guarantee to rapidly build a deposit book and perhaps not meeting other conditions that the Reserve Bank or Treasury would want to impose. I think that those three matters are serious issues, and they are worthy of debate and consideration. We have seen them included in the regulatory impact statement, and it is assumed that they will represent, or already represent, Government policy, although one can never be sure. They were certainly not mentioned in the questions and answers that I referred to.

But the questions that were raised by the unions and by the economic thinktank that are referred to in annex 3 about the other conditions around employment protection and mortgage holiday provisions simply have not been included in the regulatory impact statement other than to say: “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.” Again it is very much targeted to the finance company sector, not to the banks, yet I am sure that it is the banks or the banking unions that are looking for some security for their banking officers, who are facing contracting out to overseas placements. I think that the Minister ought to respond to this. Because we have not had the opportunity to debate these issues with officials during a select committee process, we missed the opportunity to ask ourselves whether it would be worthwhile from a public perspective to say that while we are giving this protection to investors, we will also give this protection to those who have borrowed.

The mortgage holiday provisions are clearly designed—from the promotion of those who brought them to the attention of the officials—to help people through a difficult situation in a difficult economic climate. I think that the public would find a lot of this kind of proposal much more satisfactory if they could see that there was a benefit that went beyond what they were prepared to meet the cost of, or meet the risk of, whereas the mortgage holiday provisions really do not represent a significant risk to the banks and would be a huge sign of goodwill at a difficult time, especially with so many people facing redundancy. These redundancies are affecting families that have never experienced redundancy in their lifetime. Because these issues have been raised in the regulatory impact statement, which was not tabled in the House but in fact hidden on the Treasury website, I think it would be worthwhile to have some dialogue around these issues, because they are conditions whereby I think it would be a ripe opportunity for a bit of a win-win. The public would see some broader benefit being brought to bear and at the same time it would provide for confidence between our two markets. I would like the Minister to respond to the fact that in the regulatory impact statement the banks say that they see no risk—

I move, That the question be now put.

Part 2 contains the main seven clauses of the Crown Retail Deposit Guarantee Scheme Bill. Clause 5 enables the Minister of Finance to set the eligibility criteria for the extended scheme. This clause is very flexible and broad. However, it does not provide the eligibility criteria. Actually, the entire bill does not outline the eligibility policy; it merely provides the Minister with the authority to determine eligibility. Based on the broad terms indicated by the Minister at the end of August, the key eligibility criteria are likely to be that applicants must be in the current scheme—except for new banks and merged entities, at the Crown’s discretion—and they must have a BB credit-rating or above. Collective investment schemes will not be eligible for the extended scheme.

Labour members have some concerns about this policy. The first concerns the requirement that companies have at least a BB credit-rating in order to be eligible. The problem is that some companies might not be able to obtain a sufficient credit-rating, having insufficient scale to meet the requirements of the credit-rating agencies. Secondly, it could cause a shake-out in the non-bank sector, resulting in further finance company collapses and further losses for mum and dad investors, while the big banks move in to mop up customers. Thirdly, the banks are able to benefit from the wholesale guarantee, without being obliged to contribute to the retail deposit scheme. To that extent, it is fair to suggest that big banks may win twice. They pay less in fees and they get a greater degree of the market share at the expense of smaller institutions, which will no longer be able to rely on the guarantee and will fall over.

My having said that, we should remind ourselves that the above policy, which has caused us such concern, has added to the whole range of policy settings that shelter the internal economy at the expense of the traded economy. I was involved in the public hearing of submissions to the multi-party banking inquiry last week. For me, listening to the submitters across the board expanded my horizons. Let me quote what was said by Mr John Walley, who was representing the New Zealand Manufacturers and Exporters Association. It is relevant to what we are talking about regarding the bill: “Banks have grown faster than the surrounding economy, indicating wealth transfers from the traded economy to the non-traded economy.” Therefore, “the ‘must-trade’ imperative must be at the forefront of our policy design if greater investment, and consequently higher growth and productivity in the export sector, and ultimately our entire economy, is to be anticipated.”

It is worth noting that in 2008 the banks made consistent growth over time of around $3.2 billion—more than the entire NZX50 less the banks. I quote again: “We doubt this is either healthy or sustainable for our economy.” Thank you.

I move, That the question be now put.

The CHAIRPERSON (Eric Roy): The question is that the question be now put.

I raise a point of order, Mr Chairperson. We have been on Part 2 for only a little over 30 minutes. It is the substantial part of the bill. It is a bill that the Opposition has not seen, it being introduced under urgency. There are other Opposition speakers; Mr Chauvel has just arrived, and wants to speak on this part. I think that for a bill that has not been seen by the Opposition and that has not been to a select committee, to accept the second Government motion of closure on the main bulk of the bill after a little over 30 minutes of debate is disappointing. I wonder whether you would consider accepting a few more calls, given that we are debating this bill under urgency.

The CHAIRPERSON (Eric Roy): I do not need any assistance. There have been nine calls. I try to be as fair as possible. There is not a great degree of divergence of views on this part. I have not been persuaded by a great wealth of new information to accept more calls. I have listened very carefully to the debate. I have made the choice that I will take the closure at this point.