8 Feb 2010

End of bank guarantee scheme may be in sight

8:42 pm on 8 February 2010

The Government is to review its guarantee for investors who lend to New Zealand banks through the wholesale money markets.

The review follows the decision of the Australian government to wind down its wholesale guarantee scheme.

Under the scheme the Government would pay investors back money lent to the banks if one of them went bust.

At the end of last June the Government faced a potential liability of $5.7 billion under the scheme. But no bank in New Zealand has used the scheme since November, and the Finance Minister's office says it is now under review.

A spokesperson for the minister says the Australian decision is a welcome sign that markets are returning to normal.

The Government is expected to make a decision on the future of the scheme in a few weeks' time.

The retail deposit guarantee scheme is not affected.

KPMG banking partner Godfrey Boyce says, however, that the scheme should be left in place till the banks have weaned themselves off volatile short-term borrowings.

Scheme served its purpose - Swan

The Australian government says its scheme has served its purpose in helping to stabilise the financial system.

The government guarantees were announced in October 2008 to help banks maintain access to funding during the global financial crisis, and to ensure customer confidence in Australia's banks.

Wayne Swan says bank funding conditions have improved and no Australian institution will need the guarantee to fund themselves.

He says Australian banks and other lenders had so far paid around $A1.1 billion for the use of the guarantee and will pay around $A5.5 billion over its full life.