Tax and finance
The Government has announced the details of a bank guarantee scheme it hopes will stop the financial system running out of cash at the same time as it announced a deal with banks to take it easy on mortgage customers hit by the recession.
Finance Minister Michael Cullen today confirmed the Government will offer a wholesale funding guarantee facility to investment-grade financial institutions in New Zealand.
It has already offered a guarantee of up to $1 million for retail deposits to stop worried customer pulling their money out.
The wholesale scheme is designed to apply to individual securities issues and with a graduated fee premium schedule which gets more expensive for banks with low credit ratings and the longer the guarantee is intended to apply for.
It has been estimated the total liability could be up to $450 billion, if banks chose to cover all their funding.
Dr Cullen also said he had exchanged letters with the major mortgage banks about how they would handle mortgage customers who were temporarily unable to meet their payments times ahead.
The banks have indicated that where mortgage-servicing could be resumed within a reasonable period, they would work with borrowers to avoid forced sales.
They had a variety of ways of doing this such as by capitalising interest or temporarily reducing mortgage payments in order to help get borrowers back on their feet again after experiencing a financial shock.
Dr Cullen told NZPA that the agreement was a promise to act in good faith, but also recognition that banks in New Zealand rarely used foreclosure as a first option when dealing with customers.
There had been some consideration of working the promise into a contractual arrangement, but this would have probably caused problems without gaining much in reality.
"Responsible borrowers can count on support from their banks through the challenging international economic times that will negatively impact on us here at home over the next few months," Dr Cullen said.
Treasury Secretary John Whitehead and Reserve Bank Governor Alan Bollard said in a statement the primary goal of the banking guarantee was to support the re-entry of New Zealand banks to regular foreign markets to raise cash, though it could also apply to debt instruments raised in New Zealand.
There had been fears that banks based in New Zealand would have cash dry up as overseas investors stayed clear of any bank that did not have a Government guarantee.
The facility would be available to financial institutions that had an investment grade credit rating and have substantial New Zealand borrowing and lending operations.
The facility will operate on an opt-in basis, by institution and by instrument.
A guarantee fee depend on the credit rating of the issuer and the term of the guarantee.
Dr Cullen said the guarantee's variable fee was designed to encourage the banks to apply the guarantee where it was needed and only use it as long as necessary.
The guarantee would apply to individual transactions which would have to be approved by Government officials.
In practice this would mean, because of the extra cost in paying the guarantee fee, banks would only want to apply for the guarantee when it was necessary to ease fears of offshore lenders.
Other Government's have sought equity in the banks they are guaranteeing, but Dr Cullen said that was not necessary in New Zealand.
In those cases the banks had needed to be recapitalised and no one in the private sector was willing to do it.
The banking sector in New Zealand was fundamentally sound, he said.
The problems here were due to the international credit crunch drying up funds, without the guarantee there were fears that the banks access to cash would dry up.
Without that cash, banks would not step lending and the economy could grind to a halt.
Dr Cullen said the scheme was a "necessary evil".
It was difficult to estimate how extensively the banks would use the guarantee and as a result how much the Government would bring in as fees.
Dr Cullen estimated it could be around $1 billion.
"It will be important not to spend that, as we may need to use it (to cover the guarantee)," Dr Cullen said.
No matter how the retail and wholesale guarantee schemes were designed there were going to be problems around the margins, he said.
Because debt issued in New Zealand could also be covered it would mean some of the problems being faced by non-bank lenders, borrowers and investments could be sorted out Dr Cullen said.
Because there was no blanket guarantee and Treasury had the ability to change the free premiums and rules around the margins, it should limit the risk to the taxpayer.
Meanwhile, National Party leader John Key has welcomed the move to shore up the security of the economy with the wholesale bank guarantee announced today.
" The wholesale guarantee was a necessary extension to the banking guarantee programme given the moves taken by others."
Mr Key also welcomed the assurances offered by trading banks that they would show compassion for New Zealanders who found themselves in tough times.
"My expectation is that in light of the Government guarantee to banks, banks themselves will be very careful about the manner in which they deal with customers who may, as a consequence of the global financial crisis, find it hard to meet their obligations."
Mr Key says National has been kept informed of developments and has received regular briefings from Treasury and Reserve Bank officials.