English Bill: Ministerial Statements — South Canterbury Finance—Receivership and Retail Deposit Guarantee Scheme 
English Bill: Ministerial Statements — South Canterbury Finance—Receivership and Retail Deposit Guarantee Scheme 
[Volume:666;Page:13753] 
Hon BILL ENGLISH (Minister of Finance) 
: 
 I wish to make a ministerial statement under Standing Order 347 in relation to the receivership of South Canterbury Finance and the coverage of depositors by the Crown Retail Deposit Guarantee Scheme. I seek leave for my statement and for the response of the leader of the Labour Party and the co-leaders of the Green Party to be 10-minute speeches with the other parties to have speeches of up to 5 minutes and for my reply to be a 5-minute speech. 
Mr SPEAKER 
: Is there any objection to that course of action being followed? There is none. 
Hon BILL ENGLISH 
: The deposit guarantee scheme was announced by the previous Government which set the terms of the guarantee in late 2008 and was supported by the incoming National Government. At that time the turmoil in world financial markets caused many OECD countries to take unprecedented steps to protect their financial systems including nationalising banks and providing sweeping sovereign guarantees for most financial system deposits. Administration of the scheme was delegated to the Secretary to the Treasury in accordance with policy guidance set by the Minister of Finance. South Canterbury Finance was admitted to the scheme on 19 November 2008. The essential test for admission was whether it appeared necessary or expedient in the public interest. Under the deed of guarantee participants could take on increased deposits in lending but were required to pay fees in respect of any growth. Allowing participants to continue lending was a major aim of the guarantee scheme. 
At the time South Canterbury Finance appeared sound. In June 2008 Standard and Poor’s had affirmed a stable BBB- credit rating and commented that “asset quality is sound underpinned by a modest risk appetite proactive risk management and sound underwriting standards.” However this was not necessarily the case. In the 4½ years to December 2008 South Canterbury Finance’s assets had almost doubled from $1.1 billion to $2.16 billion. As 2009 evolved it became clear that much of this additional lending was not high quality. The balance sheet expanded slightly under the guarantee peaking at $2.35 billion in June 2009. It is clear however that the great majority of problem lending occurred prior to entering the guarantee. 
In mid-2009 Treasury appointed KordaMentha as advisers to report on the company’s financial position. The June 2009 Crown accounts included a provision of $831 million for the deposit guarantee scheme. The majority of this provision related to South Canterbury Finance. Assessing the potential risk was complicated by related party lending generally poor credit and accounting processes and more recently the departure of most of the senior management. Despite this deteriorating position South Canterbury Finance remained in compliance with the deed of guarantee and as such there was no ability or cause for the Crown to withdraw the guarantee. If for whatever reason South Canterbury Finance’s deposit guarantee had been withdrawn existing depositors would still have been covered for the full term and the Crown’s exposure would have remained. 
In September 2009 the Government moved with unanimous support in the House to extend the retail deposit guarantee until the end of 2011 though on significantly more restrictive terms than previously. On 1 April 2010 South Canterbury Finance was approved for entry to the extended scheme when it started in October 2010. Its admission into the extended guarantee did not materially change the Government’s risk in the event of default. In the event because South Canterbury Finance entered receivership before October the extended guarantee scheme never applied. Payments to depositors will be made under the terms of the original scheme. 
During the period of the guarantee Treasury and its advisers were in close contact with the firm. Once it became apparent that the firm was in difficulty there were proposals either to acquire parts of the firm or to recapitalise. I instructed Treasury officials to work cooperatively with the firm on these options. However they all effectively amounted to a bail-out by the Crown with extra costs and risks to taxpayers. At no stage would Treasury have recommended accepting any of these proposals. 
At the request of its directors South Canterbury Finance was placed in receivership on 31 August. The ultimate cause was insolvency not lack of liquidity. The Government then moved promptly to ensure that the depositors would be repaid swiftly. As well as repaying $1.6 billion of remaining depositors the Government extended a loan facility of $175 million to the receivers to ensure prompt repayment of prior charge holders and extended the guarantee to a small number of previously ineligible depositors. These decisions were taken for commercial reasons. They avoided the need to pay ongoing interest that otherwise would have accrued over many months or years as investors submitted claims and also the risk that receivership might be controlled by prior charge holders to the potential disadvantage of the Crown. Treasury estimates that the net saving to the Crown is about $100 million as a result. 
The Government’s recent moves ensure that the receivership will be conducted in an orderly fashion that minimises disruption to businesses either financed or owned by South Canterbury Finance. The receivers this week called for expressions of interest from possible buyers of South Canterbury Finance’s assets. 
While the Crown has had to make good its guarantee to depositors it will recover some of the proceeds out of receivership. Once the receivership is finished this will largely complete the cycle that began in October 2008. When the fees collected from the wholesale and retail guarantee schemes are included the net cost to taxpayers is likely to be between $300 million and $400 million. Although this cost to taxpayers is considerable this expenditure did help prevent the potential collapse of the financial system. In the light of ongoing bank bail-outs around the world this net cost is the insurance premium that our economy has paid to avoid potentially catastrophic losses to taxpayers over the last 18 months.