Banks privately incredulous over bits of bank guarantee scheme

New Zealand bank executives are privately stunned by parts of the deposit guarantee scheme sprung on them over the weekend, arguing much of it is unfair, unworkable and dangerous. Banking industry leaders have publicly welcomed the scheme and are geniunely pleased that it will settle an increasingly nervous and volatile depoistor base, but they have told interest.co.nz they are very concerned about the lack of a wholesale deposit guarantee and simply cannot believe finance companies will receive a government guarantee which is being paid for by the large banks. "This is a crazy thing to be doing," said one bank executive of the moves to guarantee finance company deposits. "You've now got a giant arbitrage opportunity which will lead to more finance company failures," the executive said. "It will all end in tears within 3 to 6 months." Finance companies would be able to sharply grow their doposits thanks to a government guarantee and lend to the same property developers who had failed in the last two years, they said. The scheme needed to at least limit the growth of finance company deposits to that of the entire system to avoid a massive flight from quality to riskless high interest rates, said one executive. Industry leaders said the decision to charge banks with NZ$5 billion in deposits a fee of 10 basis points while smaller banks and finance companies would get the guarantee for free was beyond belief. "For some to be affected and others not is just ridiculous," said another banking executive. "It's a frightfully political decision," the executive said. Privately, some executives were furious that AA rated banks would end up paying a type of insurance so junk-rated finance companies could raise money with a AAA rated guarantee and then lend it to bankrupt property developers. "This is quite upsetting," said one executive with a certain amount of understatement. But the bigger concern was the lack of a guarantee on wholesale deposits when Australia had explicitly guaranteed the same lending by its banks. "It's difficult for a New Zealand institution to access the wholesale markets already. This is going to make particularly difficult," said one executive. Banks were particularly worried about the risk international lenders would shift their wholesale money from New Zealand to Australia to access the Australiang government guarantee. "We don't want this situation where there's this gap. If people see an opportunity on either price or risk they will move quickly to take that opportunity," said another executive. Banks hope they can convince the Reserve Bank to extend the guarantee to wholesale inter-bank lending as well as regular deposits.