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New Zealand's Weak Institutions Miss Out On Extended Retail Deposit Guarantees

Fuseworks Media
Fuseworks Media

Extracted from "Moody's Weekly Credit Outlook", dated October 18, 2010

New Zealand's new retail deposit guarantee scheme, which began 13 October and will end 31 December 2011, will further consolidate the non-bank deposit-taking (NBDT) sector. Weak institutions, unable to qualify under the new scheme and struggling to retain their deposit bases, will need to merge with other institutions or disappear. Depositors at weak institutions which do not qualify for the new scheme may encounter a temporary moratorium on repayment of their deposits if their institution experiences a deposit run, which would be credit negative. However in the end, consolidation should result in a stronger NBDT sector with larger, more diversified institutions.

We expect to see a flight to quality as depositors at weak institutions (which do not qualify for the new guarantee) move their funds to stronger institutions, which include banks and NBDTs that are approved under the new scheme.

The old scheme was in place from 12 October 2008 to 12 October 2010. A large number of banks, building societies, credit unions, savings institutions, and finance companies were approved under the old scheme, which helped maintain confidence in New Zealand's financial institutions during the recent financial crisis.

However, many weak institutions approved under the old scheme made claims under the guarantee when they experienced liquidity issues. The new scheme will operate with a change in terms and conditions, which should alleviate the moral hazard risk that guarantee schemes tend to attract.

We do not expect banks to apply under the new scheme as their deposit bases appear to be stable and their balance sheets reasonably sound.

Stricter eligibility guidelines will limit the institutions allowed to apply for the new scheme. Deposit-taking institutions must have a credit rating of Ba or higher and must have been guaranteed under the old scheme. (Institutions rated lower than Ba or unrated institutions were allowed under the old scheme, although eligible rating levels were later restricted to Baa or above for new entrants.) Collective investment schemes are also no longer eligible.



Compared with the old scheme, the new scheme tightens certain terms and conditions under the guarantee.

Eligible bank deposits will now be covered up to a maximum NZD500,000 and eligible non-bank deposits to a maximum NZD250,000 per depositor per institution (the maximum under the old scheme was NZD1million per depositor per institution).

The fee schedule for institutions that use the guarantee has also been modified to be more risk-based, based on a granular credit rating scale (the old scheme used wider credit rating bands).

The government has expressed a clear expectation that the new scheme will be removed at its end date, 31 December 2011. The government believes the scheme's limited term will provide sufficient time for institutions to improve their business in advance of the withdrawal of the guarantee, while not allowing the market to become dependent on the guarantee.

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