I am pleased that a deposit guarantee scheme has been announced, but am surprised at the content.

That the scheme is free for instutitions with under $5bn in deposits means that the very institutions most at risk of default pay nothing for protection. I would have expected all deposit-taking institutions to have to pay to participate, and perhaps would have expected some sort of 'haircut' for those who have to claim (e.g. they only get 95% of their deposit back, or lthey ose one year's interest).

I appreciate the need to maintain faith in banks, but the way this scheme is structured appears to provide an incentive for investors to move their savings out of safe institutions and into the riskier ones with higher yields.

It's just another step on the road to nationalisation of the money supply which I fully support.

Whether they realise that is another matter but it makes that step much easier.

It's clearly an emergency reaction but given the carnage due next week probbaly justified.

The next step is to raise capital requirements for banks.

Will this include bank bonds?

Good idea except cant imagine why Labour announced it in a back door fashion .After all John Key spoke of the scheme on october 11 in nz herald just last wednesday.Cant work out why such an important thing for a nation in deep red as admitted by Cullen ,should be politisied at the opening of an election campaign .surely for the sake of the nation and not just a few the whole scheme should have been announced in a bi partisan way.THATS WHEN WE ALL WOULD FEEL TRUST WAS WORKING WITH ALL THE RIGHT MOVES?HOPE WE AS A NATION STILL LIVE IN A DEMOCRATIC COUNTRY.WITH TRUST.

We the taxpayers have without consultation nationalised (or at least promised to) the liabilities of the whole deposit taking structure of New Zealand. Or so it would seem.

I think we need to see, immediately, contingent plans to control renumeration packages of the officers at these private institutions and open the books to see what we are really up for. How many billions for instance? Control lending practices or at least have them scrutinised in the public arena. Debate is paramount at this juncture. Apparatchiks at the Treasury and RBNZ operating behind closed doors is unacceptable.

Anything less, means we really have to face the dark reality of fascism engulfing our society.

so is your money safer at home or as a one or zero on a disk pack at a bank data center....mmmmmmm

confidence vs insurance...

whatever way bernard your 30% house price falls now looks aneamic....

Hi Stephen, should we be concerned that it appears CULLEN has acted in a unilateral manner or is that just jumping at shadows?Regardless of that i feel the fear that a minority government can do this without consultation with his support partners that existed up to the end of the present term,and if he did,regardless of what happens tomorrow ,the announcement seems to be a done deal?

Raf - one thing you can be sure of is that no-one will be in a position of walking away from their mortgages if their bank fails. The receiver for the failed bank will see to that.

The only way that could happen is a scenario of hyper-inflation where the debt becomes worthless. Aint gonna happen. Not here anyway.

I dont understand. Higher interest rates reflect higher risk. Why on earth would you put your money in a bank that offers a lower interest rate than a finance company guaranteed by the government? there is no additional risk so are we going to see a run from banks to finance companies? Absurd. This effectively is equivalent to saying all deposits have the same risk as risk free governement bonds. What the goverment should have done is offered cut price insurance to deposit taking institutions, and the cost of the insurance would reflect the degree of perceived risk.

Yeah, the big fly in the ointment is the definition of retrospectively? When those folks who had thought all was lost get a wiff of this ... what a mess. Could be a political nightmare.... as well as a fiscal one.

Seems to me CULLEN and CLARK have made a kneejerk reaction to seize the initiative and make them look and sound a lot better than they have shown ,with their pathetic handling of the NZ economy in the last 9 years ,in fact have they jumped the gun?instead of waiting a little longer when better experienced people will get the right formula .All they seem to be is a one trick pony with selfish self serving interests.

There are a few people in here complaining about this move, and presenting some scenarios fro ripping off the system. I think

- The government was left with no choice but to implement this insurance, otherwise one could be fairly sure that a bank run would occur within the next two weeks with funds moving to other countries that do insure funds. All it takes is one stupid scaremongering media report, the NZ media is particularly adept at producing such reports.

- Australia implemented insurance - this means NZ had no choice, otherwise funds would be flowing over the ditch.

- They haven't thrashed out the details (see Mr. Keys statement) - such details are still to be worked out and it may be wise to hear these details before criticising the move.

Having read all the comments above I find that most of the authors appear not have any real interest in this subject, i.,e., they have no deposits in the banking system. I do have and I can say that I will be extremely angry if my funds are "stolen" by the system. James Smith

Hi, put this on your other blogg so have edited after reading the above...most still applies

Hard on the Big Banks as they will be paying for it and unlikely to be the ones that would ever need to use it - and it will provide a large competitive (anti-competitive??) leg up for finance companies.

Still , not complaining as the only two finance companies we thought OK and put mum into middle of last year were Sth Canterbury and Marac .

Does it include the consumer finance companies?? Like the ones which have ( and still are ) promoting 24 months interest free etc etc and encouraging our population to live on credit. i wonder what their books are beginning to look like. As a taxpayer i hope not as I can see us holding all those loans as they bailout and start up new company XXX Finance Company 2009"¦.of course after they have paid their directors huge back payments.

And under $5 billion they don't pay for it - what a joke.

Probably why Labour wanted to do this themselves. If they have widened those institutions qualifying for the guarantee too far we could end up regretting this big time. Any one want to be the next government?

Anyone keen to start up a finance company with me. Could be a great lark. Might be a boom industry.

I just hope there is some devil in the detail.

It may even show once you get into the specifics that having guarantees is not the answer as it is too hard defining where to draw the line. Only banks"¦and all money comes out of finance companies. Only one country (Ireland was first?) and you get capital flight. All institutions and as taxpayers we are not just ensuring against unjustified runs on the bank (more like clicks on the bank) we as taxpayers are possibly taking on all the excesses of reckless lenders and borrowers and even worse potentially perpetuating and increasing the excesses for a future crash on an even bigger country scale. Anyone heard of Iceland. I think the IMF will be kept busy. No wonder Paulson is worried"¦. they might not have enough left in the coffers to bail -out the USA.

Jim Rogers is right"¦step back, let the weak fail and let capital flow into the strong - Only 2 years pain. But...... his job is not as an elected politician. Kind of where Democracy falls down. So we may be looking at the the Japan scenario of the last 20 years. Ouch
I just wish it was a bad joke or dream.

So on a philosophical level I have now talked myself out of guarantees but why on a geopolitical (and electioneering) level they had no choice. but I think now Maui's isn't the only fish-hook

What level of capital will be required?
Who will assess whether an institution is fully compliant with its trust deed. How stringent will this process be?
Will there be limitations on related party transactions, directors fees and shareholder payments?
If declined it would spell an institutions death knell.

Its clear details need to be looked at as mentioned above:

- Capital Requirements.
- Gaming the system.

We should also note that Parliament is not sitting and this was enacted under the Public Finance Bill which gives the Finance Minister powers to act.

But also remember policy is being made on the hoof by all the main monetary authorities. NZ is small fry in that. It will just follow the herd.

Its all about trying to maintain some kind of confidence in the banking system. They do not want a global run on cash. As we all know there isn't much of it around.

After reading info From Stephen Hulme it appears the present problems have bean caused by CDS's. Banks and financial institutions insured others for what they thought was little risk and so made no allowances for failure. Now our Govt is creating its own CDS market, it needs to set aside $ in case of failure. I have so many questions about solvency, effects on markets etc. I for example deposit with Rabo accept less interest for their AAA rating, under this an AAA rating is worthless as long as the Govts IOU is good. So I may as well go to a finance company exposed to solvency issues because of risky lending to the dairy industry and make hay while the sun shines. It makes a nonsense of the prudent banks and rewards risk.
I also have a two year window to get the best interest before returning to safety. So in two years there will be a lot of deposits maturing ,just in time.

SADLY MY SUSPICIONS HAVE BEEN BORNE OUT THE RBNZ AND THE PRESENT GOVERNMENT KEPT JOHN KEY AND CO OUT OF THE LOOP IN DISCUSSION REGARDING THE BIGGEST FINANCIAL CRISIS TO EFFECT NZ EVER.JOHN KEY CONFIRMS THAT.HOPE WITHOUT JOHN KEYS INPUT CULLEN AND CO HAVE NOT MADE A MISMASH OF IT ALL.JUST TO GET A FEW VOTES.I WOULD LIKE TO THINK THAT THE WELLFARE OF NZ IS MUCH MORE IMPORTANT THAN A POLICY OF MISTRUST.

I can understand the pressure to guarrantee bank deposits. BUT FINANCE companies????

Crikey!

I'm gobsmacked.

PeterR and Malcolm, AndrewJ you make good points. All people who think which governments are short of.

Unfortunately while necessary this probably goes too far. Interesting too that Kiwibank will not be paying much with just over $5billion in deposits.

More questions-
How will this ever be reversed or phased out?
Why hold New Zealand Treasuries when you can hold Finance company deposits at high interest rates for the same security. Ouch
Will the Government have to offer the highest interest rate in the economy to attract funding
What are the banks that are having to pay for this going to have to pay depositors to compete. Look out for increasing mortgage rates. Lower property prices, more defaults.

And labour didn't include National in the discussions when it was them recommending it be looked at and there may still be a possibility they form a Government. Very cynical. But our media will fall for it.

And who will pay for the bank depositors guarentees ?why you of course,the depositors.your return will be minute ,if any.

This is great for me im a saver and all you tax payers have guaranteed my investments.
For years my friend have been deriding me. You are taking to many risks, banks could fail you are safer in housing etc.. Well they are wrong I now have the safest investment in the country as save as treasury bonds but with better interest and all you hardworking tax payers have made it possible .A big thank you from me and my family.
oh there is one little problem its called a derivative click on this link if you wish,but put on your seat belt first.

http://www.marketoracle.co.uk/Article6756.html

Gail M
If you have been reading the papers the dire consequences in other countries are just coming home to roost in the form of Credit Default swaps and big loses for the FDIC.

The FDIC has been having to run around doing all sorts of deals at this stage trying to keep the claims blowing out. Remember this is just the end of beginning to this mess.

With other countries deposit insurance has had to be paid, it is ongoing and therefore a depositor in a such a bank will get a lower rate of return than from a bank which doesn't have it. Normal risk and reward. In this scheme some pay some don't and the whole premise of risk and reward are turned around.

Who will want to by low yielding Treasuries or Government Bonds?

If the government body formed decides an institution will not be covered they might as well shut up shop. Maybe they will be able to go the Commerce Commission for compensation.

Maybe there is more detail to come and hopefully Labour who is the Government after all eats humble pie and includes other parties (and economists) in ensuring this while necessary at some level causes the least damage long term.

Well, so little old New Zealand is playing follow the leader. From where I am sitting, in West London, with no less than 4 bank accounts having been snarled up between myself & my wife in the last few days, this bipartisan announcement has just made Godzone look a whole lot more attractive to stash a few quid. Anyway, not sure why the Finance companies are getting included, but hey, maybe Andrew from Ngaio could lend them some glue to stick around a bit longer - lol.

"With other countries deposit insurance has had to be paid, it is ongoing and therefore a depositor in a such a bank will get a lower rate of return than from a bank which doesn't have it. "

Errm -really? Look at the UK, which is what I'm most familiar with. All the banks and building societies are covered. I'm not aware that the cover has required a specific fee to be paid...And yet it seems to manage to sell Government bonds, too...... though maybe that has only been because deposits were only covered up to a specific level so the competetive advantage is lost for very large investors.

Again, the government has the capacity to regulate who can be a licensed deposit taker and what constraints they need to operate under. If the government might end up carrying the can, then they will have a great incentive to do just that, which has to be a good thing.

Deposit insurance which one has to pay for one in the end is quite different to a Government guarantee and especially one that includes all finance companies, credit unions and building societies.

Note that in the UK after the Government had to bail out Northern Rock (not because of any insurance or guarantees) subsequent to the bail out they had to stop taking deposits because of the very fact it was now Government supported and depositors flocked to it. Other institutions were not very happy.

It shows the kind of imbalances that will occur and not just on a domestic level. What will happen is just very uncertain and I don't know the outcome especially when you have to factor in parties wanting to get re-elected and keep their jobs.

Gail I hope you are right and your faith in the Government (whichever party it is) and regulation sees us through this. What ever happens things have and will change - big time.

Can some one please advise us why Skyfalling and most others of us on this blogg are off the mark. The initial media comments don't seem to be asking the hard questions. Have you read John Armstrong's piece in the Herald - goodness me!

I note that you have to be a resident or citizen to have your deposit insured. So an Australian with deposits here would not be insured??

I have deposits in Australian banks..mainly Macquarie...(:-(...given the currency collapse) and I wonder if they are insured? Does anyone know the detail of the Australian scheme?

I would guess that there could be overseas deposits here, which might exit..to Aussie.. if not insured. Tho the very existence of a deposit insurance gives stability to the Banks in general.

But I agree with those who are saying "moral hazard" and unintended consequences if the detail in this scheme is not tidied up.

Andy,

I am not sure what the difference between the insurance and government guarantee are. I would consider it an insurance as the banks are being forced to pay a premium to be covered.

Perhaps its insurance for banks and a government guarantee for finance companies.

I dont think there has been a lot of planing, just a knee jerk reaction to overseas moves to safe guard banks and fear here of massive removal of deposits to guaranteed accounts in Aust. like happened to Uk when Ireland guaranteed its deposits last week.
I would still remove deposits from Macquarie bank.

What are deposits ? ? ? when referring to the 2 year guarantee for NZ Trading Banks
money on deposit/term deposit,
money in savings accounts,
credit funds in visa accounts,
money in cheque accounts,
money in business cheque accounts
money held in foreign currencies accounts at NZ trading banks

It would be great to know what they are referring to.

THEY DONT KNOW THEMSELVES ?THEY DO KNOW IF RETURNED ?A MINI BUDGET WILL BE ANNOUNCED ,PROBABLY TO UP THE TAXES AGAIN IN KEEPING WITH NO TAX CUTS FROM 1999 TO 2008 AND A HALF.

It seems sensible to include the non bank deposit takers given the (supposed) imcreased goverance to be applied to this sector re the Reserve Bank Amendment Act. Sure it may encourage the ratbags to again try their hand but given the carnage of the last 2 years in this sector and the SFO now taking action against many of the failed company's those remaning needed to be included otherwise the rest of the money deposited in this sector would have been at risk. To not include them will only encourage more investor flight and place more stress on the sector.

FYI a more considered view

http://www.interest.co.nz/ratesblog/index.php/2008/10/13/opinion-this-sc...

I can hear those $500 a bottle wine corks popping now as finance company directors and their prefered clients 'high five' it. "Yes" said Alan Bollard, "finance companies get a free ride"

It is disappointing that the bulk of the feedback re the guarantee scheme has been focused on the finance companies which make up such a small portion of the total investment monies in NZ. I work for a finance company and are in regular contact with managment from some of the main finance companies and all agree that this scheme is good for all investors and will not likley be abused by the mainstream finance companies - it is no use taking in bulk funds now on short maturities and lending long if it presents a problem in two years if the guarantee is lifted. Remeber also that shareholders of finance compnaies can not profit from this scheme the only winners are the investing public.