Deposit scheme 'useless'

By ROELAND VAN DEN BERGH The Dominion Post | Monday, 8 Feb 2010

Banks should stop relying on the government guarantee for deposits, which provided no real benefit to customers, KPMG banking specialist Andrew Dinsdale says.

His comments follow a decision by the Australian Government to end its guarantee for bank wholesale funding and deposits over A$1 million from March.

The New Zealand Government said yesterday it would probably match Australia's decision to end the guarantee from March 31.

Retail deposits under $1 million would continue to be covered till next year, when the scheme would be reviewed.

A spokesman for finance minister Bill English said the announcement from Australia at the weekend was a sign that financial markets had returned to relative stability. A decision on the scheme could be made in a matter of weeks.

The wholesale guarantee was put in place to ensure banks could access wholesale interbank funding at the height of the global financial crisis.

Massey University head of banking studies David Tripe said the wholesale guarantee had served its purpose and banks were raising large amounts without it.

ANZ National Bank was the last to use the guarantee, on November 19 to cover US$71m of a euro notes issue.

The Government has already extended its guarantee scheme on retail deposits from October this year to the end of next year.

Under the revised scheme, banks and finance companies could also offer non-guaranteed deposits to wean them and their investors off the guarantees.

PGG Wrightson Finance was among the first to issue a non-guaranteed deposit attracting a slightly higher interest rate.

But so far the banks have said they had no plans to launch any non-guaranteed deposits, despite paying a fee for the service.

Mr Dinsdale said the banks should not be taking part in the extended scheme.

"There is no benefit to it. It is a cost the customer doesn't need to bear. There is no risk for a customer.

"If I was a chief executive, I would be saying: `there is nothing wrong with my bank, I am very comfortable with our risk profile and our credit position, we don't need a retail guarantee and we don't believe it is in the customers' best interest'."

Bank customers were never concerned about profitability or the risk of the banks losing vast sums of money during the financial crisis, Mr Dinsdale said.

Nor was there ever a real risk of New Zealand bank customers sending their money to Australia, where deposits were being guaranteed.

Instead, the guarantee supported the failing finance company sector, Mr Dinsdale said.

Taxpayers have paid out a total of $35 million to depositors in two failed finance companies, Mascot Finance in March last year and Strata Finance the following month.

However, the scheme has collected more than double that amount in fees, offsetting those losses.