New Zealand pension funds are so concerned about the lack of a government guarantee for wholesale bank accounts they are considering moving their funds from New Zealand bank accounts to New Zealand dollar accounts in Australian banks.

Funds management and banking sources have told interest.co.nz they are working closely with New Zealand's banks and the Reserve Bank to try to convince the government to adopt the Australian stance of guaranteeing interbank and wholesale deposits by institutions such as pension funds.

They are particularly concerned that Finance Minister Michael Cullen has refused to discuss this directly with banks in the lead up to the election in three weeks. Fund managers are saying a decision is needed within a couple of weeks or they will have to move their funds to protect the interests of their investors.

Banks have also warned of the risk of a wholesale exit of funds from New Zealand's banks unless the guaranteed is applied in the same way as the Australian guarantee. They say are likely to have to move the funds within a few weeks unless the wholesale guarantee is agreed.

Another unintended consequence of the guarantee scheme is the likely closure of the commercial paper market for large corporates, who previously have lent to banks and fund managers. Fund managers are now saying they are reluctant to invest in the commercial paper because it does not have a government guarantee.

This means corporates are having to draw down on their emergency credit lines with banks, which in turns forces the banks to put aside more more capital to back the loans.