6 Nov 2008

NZ banks to pay more for Govt guarantee

3:25 pm on 6 November 2008

The Government has confirmed it will guarantee wholesale bank deposits.

Under the scheme, the Government will offer a guarantee to overseas institutions that lend money to banks in New Zealand.

Other countries, including Australia, have started offering the same guarantee and there were fears that if New Zealand did not follow suit, banks could run short of money to lend to businesses and households.

Last week, Finance Minister Michael Cullen said officials were looking closely at the Australian scheme before finalising the details.

Dr Cullen said on Saturday the New Zealand scheme is fairly closely aligned with that in place in Australia, although not in all aspects.

"The main difference is somewhat higher fees, and that is in part to encourage the Australian banks in New Zealand to look to their parent banks for borrowing where possible.

"Obviously, if we'd had the same level of premium there would have been very little incentive to do that."

An economist says the Government's decision comes as no surprise.

The BNZ's chief economist, Tony Alexander, says it was evident the Government would be forced into a wholesale guarantee scheme, following its decision to guarantee retail deposits.

He says the measure will increase the chances of New Zealand banks accessing international funds as they slowly free up.

Dr Cullen said institutions that opt into the scheme will pay a fee, and can choose what proportion of their wholesale deposits they want to have covered by the guarantee.

He also said he had exchanged letters with the country's largest mortgage-lending banks, to outline the approach they will take when handling mortgage customers facing servicing problems in the challenging economic times ahead.

Dr Cullen said the banks indicated that where there is a reasonable expectation that mortgage-servicing could be resumed within a reasonable period, they will try to work with borrowers to avoid forced sales, where appropriate.

The Government announced on 12 October that it would guarantee retail deposits of savers in banks and other financial institutions, as the international financial crisis continued.

On 22 October, the Treasury and the Reserve Bank said the guarantee for deposits would be capped at $1 million per depositor per institution.