The New Zealand government has moved to provide a guarantee on wholesale funds in the financial system. The objective is to assist the re-entry of New Zealand financial institutions into foreign currency-denominated international lending markets but will also be available to cover NZ dollar denominated debt. Press statement here. Operational guidelines here.
Financial institutions will have to opt-in to the scheme by institution and by debt instrument. Issuers will be required to disclose whether or not particular paper is government guaranteed.
Only institutions with an investment grade credit rating of BBB- or better will be permitted to use the facility. The wholesale guarantee will only be available to financial institutions and not to corporate or municipal issuers of paper. The guarantee will only be available for up to 125 percent of an institution's total stock of eligible types of debt on issue prior to the intensification of the global financial crisis, dated to 12 October 2008.
Only paper issued in NZD, AUD, USD, EUR, GBP, CHF, JPY, HKD, and SGD currencies will be covered.
Guarantee fees will be charged on the basis of the particular financial institution's credit rating. Dr Cullen, Minister of Finance, estimates that the fees could raise NZ$1 billion which will be set aside as a fund to cover the guarantees in event of defaults.
The scheme will be continued until financial market conditions return to "relative normality for a sustained period" but given the nature of the international financial crisis "the guarantee scheme is likely to continue to be offered for some time."
Together with the US$15 billion currency swap arrangement with the US Federal Reserve announced mid-last week, the wholesale guarantee scheme should act to underpin the short term fund raising undertaken by New Zealand's trading banks in international markets.
Showing posts with label deposit guarantee. Show all posts
Showing posts with label deposit guarantee. Show all posts
Saturday, November 1, 2008
Friday, October 31, 2008
New Zealand Gains Currency Swap Facility with Federal Reserve as New Zealand Election Looms
Much under-reported by the New Zealand news media and certainly overlooked for its significance, the Reserve Bank of New Zealand announced on 29 October in a short press release that the US Federal Reserve's Federal Open Market Committee had approved a US$15 billion (NZ$26 billion) temporary reciprocal currency swap facility.
The currency swap will permit the provision of US dollar liquidity to New Zealand markets up to $15 billion through to 30 April 2009.
The currency swap, though modest by international standards, is similar to those used in the past month or two to ensure liquidity in the European Union, Japan, and elsewhere, where the Fed has essentially adopted a de facto international lender of last resort function.
When combined with evidence of tightening liquidity in New Zealand and the mis-management of the introduction of the recent introduced deposit guarantee system, the currency swap facility is no doubt an important lifeline for the Reserve Bank in its liquidity management in the months ahead.
Evidence is mounting of emerging liquidity problems. Expectations are that New Zealand trading banks which raise loan funds from issuing short-term commercial paper in London, a market that has effectively dried up in the short run, are very likely to have problems raising funds in the months ahead.
Reserve Bank data shows that $100 million of funds have been drawn down from the Reserve Bank's mortgage-backed securities liquidity facility recently. And the major trading banks have been quick to sign up for the government's deposit guarantee system.
Managed funds outside the deposit guarantee system are now experiencing a flight of funds to guaranteed deposits in other institutions, causing AXA New Zealand to freeze three of its mortgage-backed funds with $225 million under management.
Problems with the coverage of the Australian deposit guarantee system has seen Australian managed funds freeze more than A$24 billion in order to remain solvent.
Within the next 24 hours, the New Zealand government is also expected to announce its plans for a guarantee system for wholesale deposits to shore up the liquidity concerns surrounding the inability of the trading banks to secure funds in the London market for their lending operations within New Zealand. This should, perhaps, have been a first step in any deposit guarantee system rather than the retail deposit guarantee, especially as there was no imminent threat of a depositer run on banks.
The currency swap will permit the provision of US dollar liquidity to New Zealand markets up to $15 billion through to 30 April 2009.
The currency swap, though modest by international standards, is similar to those used in the past month or two to ensure liquidity in the European Union, Japan, and elsewhere, where the Fed has essentially adopted a de facto international lender of last resort function.
When combined with evidence of tightening liquidity in New Zealand and the mis-management of the introduction of the recent introduced deposit guarantee system, the currency swap facility is no doubt an important lifeline for the Reserve Bank in its liquidity management in the months ahead.
Evidence is mounting of emerging liquidity problems. Expectations are that New Zealand trading banks which raise loan funds from issuing short-term commercial paper in London, a market that has effectively dried up in the short run, are very likely to have problems raising funds in the months ahead.
Reserve Bank data shows that $100 million of funds have been drawn down from the Reserve Bank's mortgage-backed securities liquidity facility recently. And the major trading banks have been quick to sign up for the government's deposit guarantee system.
Managed funds outside the deposit guarantee system are now experiencing a flight of funds to guaranteed deposits in other institutions, causing AXA New Zealand to freeze three of its mortgage-backed funds with $225 million under management.
Problems with the coverage of the Australian deposit guarantee system has seen Australian managed funds freeze more than A$24 billion in order to remain solvent.
Within the next 24 hours, the New Zealand government is also expected to announce its plans for a guarantee system for wholesale deposits to shore up the liquidity concerns surrounding the inability of the trading banks to secure funds in the London market for their lending operations within New Zealand. This should, perhaps, have been a first step in any deposit guarantee system rather than the retail deposit guarantee, especially as there was no imminent threat of a depositer run on banks.
Wednesday, October 22, 2008
New Zealand Deposit Insurance Capped at $1 million Per Account
John Whitehead, Secretary to the Treasury, has announced that New Zealand's opt-in two year limited deposit guarantee scheme will cap the size of deposit that is covered by the guarantee to NZ$1 million per depositor per guaranteed institution.
The contingent liability of the deposit guarantee is estimated at NZ$450 billion.
The Reserve Bank and the Treasury have yet to announce whether wholesale deposits between banks will be subject to a deposit guarantee. Thus far, the government has held that such a guarantee is not necessary.
The contingent liability of the deposit guarantee is estimated at NZ$450 billion.
The Reserve Bank and the Treasury have yet to announce whether wholesale deposits between banks will be subject to a deposit guarantee. Thus far, the government has held that such a guarantee is not necessary.
Sunday, October 19, 2008
National Seeks Bipartisan Approach to Financial Regulation
National Party leader, John Key, has announced that his party is willing to engage in a bi-partisan approach to financial regulation policy with the Labour government in the run up to the General Election on 8 November.
Labour's announcement of the introduction of a deposit guarantee scheme for retail deposits last week caught National somewhat off guard but National quickly agreed in principle to the scheme and National finance spokesman, Bill English, received briefings from the Labour government.
Labour's Minister of Finance, Michael Cullen, has responded to Key by saying that it continues to provide briefings on the developing situation to Bill English on behalf of National.
Reflecting the high degree of Trans-Tasman economic integration between Australia and New Zealand, a policy divergence between the countries in recent days on the issue of whether wholesale deposits should also be guaranteed has emerged. New Zealand's government announced last week that interbank deposits would not be guaranteed but the Australian government has decided that such deposits will be.
National is signaling that it will not seek to make political capital out of a Labour government reversal of last week's position should Labour choose to provide a guarantee of interbank lending to harmonize this area of Trans-Tasman financial regulation policy.
Both Labour and National see the New Zealand banking system as sound given the strong balance sheets and more cautious lending policies of the major trading banks compared to their international counterparts. Nonetheless, the policy dilemma is that failing to guarantee the wholesale deposits while important economic neighbour Australia does, is to face the high risk of capital flight to guaranteed deposits in Australia and elsewhere in these uncertain economic times.
Once again, as previously pointed out here, emergency economic policy making procedures in New Zealand have proven to be inadequate in a rapidly changing global economic climate. The deposit guarantee policy as it has unfolded in the past week or so has left more questions unanswered than answered. This reveals a failure to think more than two or possibly three steps ahead.
Post-election a new government will need to launch a major review of the failure to activate and engage effective policymaking to cope with what have been demonstrated to be more external than domestic economic problems.
It is all very well to sit back with self-satisfaction and pride that New Zealand's economic house is in order, but when the economic crisis reaches your doorstep you had better have the sandbags, mops, and more affirmative instruments ready to go. And you best have thought out a train of steps ahead to respond to rapidly changing circumstances if the house threatens to be washed away.
Labour's announcement of the introduction of a deposit guarantee scheme for retail deposits last week caught National somewhat off guard but National quickly agreed in principle to the scheme and National finance spokesman, Bill English, received briefings from the Labour government.
Labour's Minister of Finance, Michael Cullen, has responded to Key by saying that it continues to provide briefings on the developing situation to Bill English on behalf of National.
Reflecting the high degree of Trans-Tasman economic integration between Australia and New Zealand, a policy divergence between the countries in recent days on the issue of whether wholesale deposits should also be guaranteed has emerged. New Zealand's government announced last week that interbank deposits would not be guaranteed but the Australian government has decided that such deposits will be.
National is signaling that it will not seek to make political capital out of a Labour government reversal of last week's position should Labour choose to provide a guarantee of interbank lending to harmonize this area of Trans-Tasman financial regulation policy.
Both Labour and National see the New Zealand banking system as sound given the strong balance sheets and more cautious lending policies of the major trading banks compared to their international counterparts. Nonetheless, the policy dilemma is that failing to guarantee the wholesale deposits while important economic neighbour Australia does, is to face the high risk of capital flight to guaranteed deposits in Australia and elsewhere in these uncertain economic times.
Once again, as previously pointed out here, emergency economic policy making procedures in New Zealand have proven to be inadequate in a rapidly changing global economic climate. The deposit guarantee policy as it has unfolded in the past week or so has left more questions unanswered than answered. This reveals a failure to think more than two or possibly three steps ahead.
Post-election a new government will need to launch a major review of the failure to activate and engage effective policymaking to cope with what have been demonstrated to be more external than domestic economic problems.
It is all very well to sit back with self-satisfaction and pride that New Zealand's economic house is in order, but when the economic crisis reaches your doorstep you had better have the sandbags, mops, and more affirmative instruments ready to go. And you best have thought out a train of steps ahead to respond to rapidly changing circumstances if the house threatens to be washed away.
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