Crown's guarantee windfall

BY JAMES WEIR

The Government will pocket about $290 million in fees from big banks using the wholesale funding guarantee, which will close at the end of April, the Government says.

But the retail deposit guarantee may not end up as such a money spinner because it could still potentially cost taxpayers hundreds of millions should more finance firms fail, government accounts show.

The wholesale guarantee scheme was brought in at the height of the global financial crisis in late 2008 when it was hard for banks to borrow overseas as international markets froze up.

The guarantee helped banks borrow $10.3 billion, with the loans backed by the Crown credit rating. The scheme was seen as a key element for New Zealand banks to get through the financial crisis.

The banks are now raising money offshore, without using the guarantee, which was always seen as a temporary measure for an "extraordinary time", Finance Minister Bill English said yesterday.

The banks were not expected to need the wholesale guarantee again before the scheme is shut down at the end of April, he said.

Banking experts said financial markets in the United States and Europe had been stabilising and so it was a lot easier to raise money than a year ago.

While $290 million in wholesale guarantee fees was a large sum, given the state of international markets banks would have been happy to pay the price to get certainty to borrow through 2009.

"I don't think any bank could claim they didn't need or appreciate the wholesale guarantee in the first nine months of 2009. It was the important part of the package," said KPMG head of financial services Godfrey Boyce. The banks were now "well advanced" on getting more longer-term funding in place, to bring them into line with new Reserve Bank rules, he said, so banks would be comfortable with the guarantee ending.

The Government signalled last month that the wholesale guarantee would likely end soon, after the Australian government announced its scheme would end on March 31.

There have been no payouts under the guarantee and none were expected. The fees will end up in the Government's consolidated funds.

The $290m in fees is close to the cost of Wellington's new base hospital, but the fees from the scheme will come in over time, depending on the duration of the guaranteed loans rather than as a lump sum.

The Government brought in a separate retail deposit guarantee for bank deposits in the global financial crisis to calm fears that may have led to a run on bank deposits.

The retail deposit guarantee has seen two payouts worth $35m because of failed finance companies Mascot and Strata.

Banks and finance companies paid total fees of $74m in the year to June 2009. The Government still expected revenues of $154m in future from the scheme.

That may have been more of a windfall for the Crown than the wholesale guarantee, because there was no evidence of any run on New Zealand banks with customers rushing to take money out.

However, in its latest accounts the Government has made provisions of $771m should finance firms covered by the guarantee collapse. That is based on estimates of which firms face a more than 50 per cent chance of failure and how much they could lose in a receivership.

That figure shows a real risk exists of more finance firm failures, despite the retail deposit guarantee that covers many of them.

The retail deposit scheme runs till October 12 this year, but can be extended to the end of 2011 for banks and deposit takers that apply to do so. But they must meet changed criteria, such as achieving a BB credit rating and a set level of capital in their coffers.

The fees will be much higher for riskier finance companies, with BB credit-rated finance firms paying 150 basis points for the guarantee. Banks or credit unions with the same rating will pay 60 basis points.

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