Check your Guarantee!

In August 2009 the Government announced it would extend its Deposit Guarantee Scheme (DGS) from 12 October 2010 until 31 December 2011.

The DGS was introduced with some urgency in October 2009 as banks and non-bank financial institutions around the globe faced imminent collapse. The DGS aimed to address the potential outflow of funds from New Zealand to jurisdictions that offered guarantees and in doing so restore stability and confidence in the banking system.

For all its flaws one has to say that the DGS has been a successful stopgap measure.

However there is now the problem of how to remove it. The DGS has contributed to raising the cost of money to borrowers (through the premiums paid to the Government by those institutions covered by the DGS). Arguably it has also assisted to maintain deposit rates higher than they might otherwise be. It has also caused large flows of money to banks and non-bank deposit takers that might not have occurred otherwise. 

So why should depositors be concerned about the extension? Because the extension comes with a tougher set of conditions and institutions need to reapply to retain their cover. Some non-bank deposit takers will not be able to meet these conditions and therefore deposits will lose their guarantee.

One of the conditions of most relevance is the need for an institution to have a Standard and Poors ‘BB’ credit rating (or equivalent) or better. While registered banks will have no problems meeting this many of the finance companies and some credit unions and building societies may struggle to meet this threshold. Removal of the guarantee for those institutions that do not re-qualify will likely lead to outflows of money thereby jeopardising its stability.

Another change is that the cap on the maximum amount covered per depositor will be reduced from $1.0 million to $500,000 with a registered bank and $250,000 for a non-bank. Collective investment schemes will not be eligible under the extension. There are further changes that will affect cover for certain types of depositors.

Depositors will need to check that their deposit will continue to be covered. Do seek advice from the institution concerned or an adviser with knowledge of this area. Information is also available from Treasury at www.treasury.govt.nz/economy/guarantee.