The Government’s decision to extend the retail deposit guarantee scheme will alleviate a source of uncertainty for the finance industry, but still leaves some tough questions.
The deposit guarantee was introduced last October at the height of the credit crisis, when many countries were introducing or expanding government protection for retail deposits. The concern at the time was that without a similar guarantee in NZ, depositors would flee offshore (specifically to Australia) to benefit from this protection. The scheme was initially set to expire in October 2010, which was expected to be well beyond the crisis period.
The guarantee appears to have achieved its initial goal – deposits at both banks and non-bank deposit taking institutions (NBDTs) have been broadly stable since October. But for months there have been questions swirling around two features of NZ’s scheme: first, the inclusion of smaller NBDTs as well as systemically important banks and second, the time limit on the guarantee, including the fact that it was set to expire a year ahead of Australia’s scheme.
Initially, there were concerns that the guarantee could encourage riskier behaviour, especially by finance companies, which have seen a string of failures in recent years. But the experience has been rather different: some NBDTs have reported a bulge in term deposits maturing around September 2010, i.e. just before the guarantee was due to expire.
Without the confidence that they will be able to maintain their funding beyond this date, they have been reluctant to lend beyond this date as well.
