Opposition MPs have formally requested Minister of Finance Bill English and Treasury officials appear before Parliament's Finance and Expenditure Select Committee to be grilled about the Crown retail deposit guarantee scheme, which is set to cost taxpayers about NZ$1.1 billion.
Radio NZ says the request follow the office of the Auditor-General telling MPs yesterday it had found no evidence that Treasury formally notified the Government of the growing financial risks it faced in the early months of the scheme during 2008 and 2009.
"Financial prudence" should have been a significant consideration for Treasury in its oversight of the Crown retail deposit guarantee scheme and Treasury should have been more willing to intervene to prevent finance companies significantly increasing their taxpayer guaranteed deposits once they had the guarantee in place rather than merely looking to recover what it could after a company fell over, Auditor General Lyn Provost said last year in an audit report on the implementation and management of the scheme.
Provost's report also revealed that Treasury let Equitable Mortgages into the scheme despite the Reserve Bank's view that the property lender, which ultimately failed whilst holding about NZ$178 million in Crown guaranteed deposits and is set to cost taxpayers tens of millions of dollars, wasn't eligible because it primarily provided financial services to a related party
Ultimately nine finance companies with deposits covered by the scheme failed including South Canterbury Finance, causing the Crown to pay out about NZ$2 billion of taxpayers' money to depositors. Recoveries are currently estimated at about NZ$900 million of that NZ$2 billion leaving the taxpayer with a loss of about NZ$1.1 billion.
At the select committee hearing yesterday Deputy Auditor-General Philippa Smith said Treasury achieved its first aim of implementing a scheme that prevented a run by investors on financial institutions. However she said it failed to properly monitor how much additional risk the Government was taking on in the first few months of the scheme as companies ramped up their lending. In her report Provost noted one example where a finance company’s deposits grew from NZ$800,000 to NZ$8.3 million after its deposits were guaranteed. And at South Canterbury Finance the deposits grew by 25% after the guarantee was put in place.
"Treasury was aware of the moral hazard it was creating by implementing the scheme, but we don't have evidence of what was reported to the minister," Radio NZ reported Smith as saying.
Labour MPs argue English should have asked more questions of the Treasury about the mounting financial risks to the taxpayer.
The Crown retail deposit guarantee scheme was introduced by the then Labour led government in October 2008 in reaction to the Australian government introducing its own one at the height of the global financial crisis, and shortly before Labour was ousted by the electorate after nine years in power. At the height of the scheme taxpayers' were guaranteeing deposits worth about NZ$133 billion with 72 financial institutions including the big banks, building societies and deposit taking finance companies. The National government replaced the original scheme when it ended in October 2010 with the extended Crown retail deposit guarantee scheme. The latter ended on December 31, 2011.
Also see Alex Tarrant's story: Timeliness of info flow from finance companies to trustees, and from trustees to RBNZ, questioned in deposit guarantee scheme review.
And Gareth Vaughan's opinion piece: Opinion: Treasury's ambulance at the bottom of the Crown retail deposit guarantee scheme cliff wasn't good enough.
(Updated with video of English answering questions at Question Time on Thursday on the matter)