Maintaining confidence in the financial system

The Government is considering options for maintaining confidence in the financial system when the Retail Deposit Guarantee Scheme expires at the end of this year, Finance Minister Bill English says.

“During the global financial crisis, many countries sought to reassure retail depositors that their savings in financial institutions were safe,” he says. “In New Zealand, we did that through the Retail Deposit Guarantee Scheme.

“As markets stabilised, those measures have been unwound. New Zealand’s deposit guarantee was extended last year under tighter terms and conditions, covering only a handful of institutions.

”It now protects only $2 billion of the $210 billion New Zealanders have on deposit and will not be extended beyond 31 December this year.

“Looking ahead, the Government is considering a number of permanent options to manage any future financial market difficulties.

“The Government does not favour compulsory deposit insurance. This is difficult to price and blunts incentives for both financial institutions and depositors to monitor and manage risks properly.

“One option for minimising disruption of the financial system and maintaining investor confidence is referred to as Open Bank Resolution. This aims to provide continuity of core banking services, allow the banking system to get back to normal and limit the costs to taxpayers.

“The Reserve Bank will discuss this option with banks over coming months.

“Open Bank Resolution permits banks to continue functioning while full resolution is worked through.

“This option has been available to the Reserve Bank for a number of years. This next stage is about engaging with the banks to ensure it could be implemented effectively if required,” Mr English says.

The Reserve Bank will shortly release details of the Open Bank Resolution consultation process.