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Mega-trend 11: Deposit guarantees

Mega-trend 11: Deposit guarantees

Bernard Hickey investigates the forces that led to the very sudden adoption of a deposit guarantee scheme in New Zealand. For years, the Reserve Bank was adamantly opposed to such a scheme - despite the fact that almost every other developed nation had one. They claimed the resulting 'moral hazard' was unacceptable, and that bank and finance company customers should do proper research before investing with any particular institution. But in early October, events overwhelmed this position. Around the world, confidence in banks suddenly leaked away with startling speed. Even countries with deposit guarantee schemes had to raise the limits, or abandon limits altogether. A sort of competitive pressure built up, especially in Europe, where it was dangerous not to have an unlimited scheme in place. On the eve of our election campaign, the then-government pressed one through, guaranteed by the NZ Government and administered by Treasury. Following the retail guarantee, and in co-ordination with the Australian, we also got a wholesale guarantee scheme. The potential liabilities for the taxpayer are enormous but uncertain. However, without one, the risks would also have been enormous and likely very certain.    

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