19 Oct 2008

National would support extension of bank scheme

9:19 pm on 19 October 2008

The National Party is calling on the Government to fast-track plans to extend the bank deposit guarantee scheme, to cover money borrowed from other banks and financial institutions.

National leader John Key said the party would work with the Government to ensure the durability of such a scheme, which would carry a potential liability of $450 billion.

The Government announced a week ago it would guarantee retail deposits for two years for banks, credit unions and finance companies which opt into the scheme.

It is now taking advice on whether to extend the scheme.

Mr Key said on Sunday that New Zealand's banks rely on wholesale funding - money from other banks and financial institutions in New Zealand and overseas.

"Our banks are fundamentally strong, but in the current international environment, without a government guarantee it will be very difficult for them to raise funds in offshore finance markets, where they will have to compete against banks with cast-iron government backing."

He said there is a risk that without a guarantee, local institutions would move wholesale deposits out of New Zealand and place them in banks in Australia, where they are guaranteed by the Australian government.

That would leave banks here less money to lend New Zealand businesses and households, he said.

Mr Key says it could be six weeks before a new government is in place, so it is important to reassure the Australian-owned major banks and the Australian government that politics will not interfere with measures to protect New Zealand's banking system.

Government considering scheme

Finance Minister Michael Cullen said on Sunday that Reserve Bank and Treasury officials are working on a possible wholesale deposit guarantee scheme.

He told Radio New Zealand's debate on the economy on Sunday that there was no need for urgent decisions, as no financial institutions have immediate issues with credit lines, and such a decision needed to be worked through carefully.

National Party finance spokesperson Bill English said Dr Cullen has been responding to the global financial crisis in a considered way.

He said Mr Key was signalling that National would work with the government to make sure the election process did not get in the way of timely decision-making.