Taxpayers' still on the hook for about NZ$8.12 bln worth of bank wholesale borrowings through Crown guarantee

By Gareth Vaughan

Taxpayers' are still guaranteeing about NZ$8.12 billion worth of bank bonds through the Crown Wholesale Funding Guarantee Scheme even though the scheme closed nearly two years ago.

Launched by then-Finance Minister Michael Cullen at the height of the global financial crisis on November 1, 2008, the scheme closed on April 30, 2010.

However, debt principal issued by ANZ, BNZ, Westpac and Kiwibank with a combined value of about NZ$8.12 billion continues to carry the guarantee until it matures, with the last of this - US$71 million from ANZ - not maturing until November 19, 2014. Treasury says no provision is made for losses under the scheme as the probability of loss is considered remote.

Although the Australian parents of the New Zealand banks moved to buy back some of their debt guaranteed under Australia's equivalent scheme, the New Zealand banks won't be doing the same. That's because the Australian banks have had to pay monthly fees on all their outstanding guaranteed debt. In contrast the New Zealand banks had to pay Treasury fees upfront when each guarantee was granted (there were 25 in total), and Treasury says they're non-refundable.

Of the wholesale debt still guaranteed, principal worth just over NZ$2 billion stems from BNZ, NZ$2.1 billion from ANZ, NZ$3.7 billion from Westpac and NZ$320 million from Kiwibank. ASB didn't raise any wholesale funding under the scheme. Should any of the banks with wholesale government guaranteed debt on issue get into trouble before the debt matures, the taxpayer would have to foot the bill.

Of the outstanding maturities, a significant sum doesn't mature until 2014. Westpac has NZ$1.875 billion of maturities in July 2014, Kiwibank's A$250 million bond issue matures in October 2014, BNZ has NZ$791 million of maturities in 2014 and ANZ US$171 million.

The combined total guaranteed by taxpayers is down from NZ$10.4 billion at June 30, 2010. In the year to June 2010, the Crown received NZ$76 million worth of fees for the scheme. When the scheme was closed, Finance Minister Bill English said the government would receive almost NZ$290 million in fees in total. The Government received a fee from each participating institution based on the institution’s credit rating and the term and amount of guaranteed debt issued.

The scheme was initiated as an opt-in wholesale funding guarantee facility. At the time Treasury and Cullen said the objective was to facilitate access to international financial markets by New Zealand financial institutions, in a global environment where international investors were highly risk averse and where many other governments had offered guarantees on their banks’ wholesale debt.

Banks using the guarantee must maintain an additional 2% capital buffer, on top of the existing required 4% Tier 1 capital, to help protect the taxpayer's position as guarantor.

See more on the scheme here.

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