Parker David: Crown Retail Deposit Guarantee Scheme Bill — First Reading Second Reading In Committee 
Parker David: Crown Retail Deposit Guarantee Scheme Bill — First Reading Second Reading In Committee 
[Volume:657;Page:6076] 
Hon DAVID PARKER (Labour) 
: 
 I rise to take a call on the second reading of the Crown Retail Deposit Guarantee Scheme Bill. Before addressing the bill in particular I will add to some of the comments made by Mr Boscawen. I hope the inquiry being undertaken into finance companies looks at some of the related party transactions of some of the finance companies. I will be interested to see what the inquiry finds in relation to any of the personnel who were involved in those transactions which were effectively fraudulent related party transactions whereby finance companies were getting money off people then lending it to themselves in other guises in high-risk ventures sometimes with limited liability so that if the loan could not be repaid by the corporate borrower that was related to them there was no recourse to the personal covenant of the person who was behind the company. If it transpires that that was a pattern of behaviour and it further transpires that the individuals who were involved were some of the individuals who were involved in similar transactions in the last crash in the late 1980s then I would suggest that some of our regulatory agencies like the Serious Fraud Office should take a close look at themselves and see whether they did their duty during that period. It is all very well to be wise with the benefit of hindsight but some of those agencies had a duty to be looking into those issues before they were obvious to everyone. So I agree with some of the things that Mr Boscawen was saying. 
But having said that I point out that we also need to be careful that we do not tar everyone with the same brush because just as there were some irresponsible finance companies there were also some reasonable finance companies that acted responsibly. It is a truism that no financial institution can withstand a run on the fund. That is true of a finance company; it is also true of a bank. I think banks in the fallout from the international financial crisis have at times been a little bit cute in pretending that they have been immune from the effects of a run on the bank and in pretending that people would not have had their money at risk in banks. Although it is true that that money might not have been as at risk in a bank as it might have been in some finance companies it is also true that were it not for the Government guarantees that were provided at both the wholesale and retail levels there could have been a run on the banks. Those banks could no more have withstood that than a finance company could have withstood a run. 
So it was necessary for the prior Government to intervene and to provide some certainty to lenders and to depositors in banks and in other non-bank financial institutions to ensure that they did not get so frightened that they all withdrew their money at once. That would have caused the demise of the banks and the finance sector it would have caused a loss to all of the depositors but it would have also caused the wheels of commerce to grind to a halt to the detriment of the economy in a wider sense and not just to the detriment of those who had invested in deposits in those banks and finance companies. 
Having said that I return to the issue of the distortions caused by guarantee schemes such as this. I note that one of the objectives contained in the general policy statement in this bill that the Government has introduced is to minimise economic distortions and to ensure in the credit markets that we have properly priced risk—what it calls “well-priced credit markets”. It is a sad reality that whenever we have a guarantee scheme like this we have distortions. There are distortions in the market that are unavoidable. One of the distortions we have here is that collective investment schemes are not eligible to have a guarantee despite the fact that the nature of the underlying transaction is very similar to other schemes that are not collective investment schemes. These are essentially deposits made by people in things like unit trusts or group investment funds. The money is invested by people in the fund and then invested by the fund in mortgages often first mortgages over land. 
Those sorts of credit instruments are more secure than a finance company investment because a finance company investment is generally a first or second-rating debenture stock which often gives a second-tier interest in securities behind other creditors whereas some of these group investment funds and unit trusts which are backed by first-level mortgages give the investor a trust interest in the mortgage. If we look through the paper we see that they are effectively obtaining a first-mortgage interest to secure their deposit. There is nothing that is more secure than that. It is possible to have a widespread depression in credit markets and people who invest in first mortgage - based securities will suffer a loss if the value of those securities decreases but they will never suffer a total loss. We are finding in some of the finance companies though that if we have a second-ranked security our security interest ranks behind the first debenture holder and therefore a depositor can be without any effective security and lose all of his or her money. 
If we look at those two comparisons—the mortgage-backed security compared with the finance company investment—we would say that the mortgage-backed security is a lot less risky. Yet because we have to have boundaries to a guarantee scheme like this the mortgage-backed security gets no guarantee; it cannot avail itself of the guarantee provisions of this scheme but the finance company can. We are causing a distortion in the market there; when we have had a run on mortgage-backed funds and because people cannot avail themselves of the Government guarantee they understandably say: “Well I will put my money where I can get the Government guarantee. Even though a first mortgage might be better than an investment in a finance company facility I will put my money with the finance company rather than with the mortgage-backed investment which is not covered by the guarantee.” 
I mention that in some detail because it shows the sorts of distortions that are unavoidable if we have a Crown guarantee such as this. It points to why we should be trying to get beyond these Crown guarantees and get out of the market eventually because in my opinion we want to have a sound secondary market and not be reliant only on banks. There are a number of reasons why that is important. One reason relates to the fact that the major banks in New Zealand are all overseas-owned. So the profits they earn are generally repatriated overseas and are lost to our economy. Indeed a large part of New Zealand’s current account deficit now is the invisibles—both the interest we pay on the overseas loan-lines that are re-lent by banks in New Zealand and also the profit margins they earn on those loan portfolios that are currently repatriated overseas. It is desirable that we have a set of regulatory affairs in New Zealand that enables our New Zealand - based financial institutions to grow. They ought to be competitive in the New Zealand market and they ought not to have competitive disadvantage as a consequence of regulatory policy settings. 
If we look at the fees to be charged to those who avail themselves of the retail deposit guarantee scheme we see that different rates will be charged according to the different risk that is perceived. The risk is lowest for those that have the highest credit-rating. So if a finance company has a triple A rating then the rate charged for the guarantee will be 15 basis points or 0.15 percent per annum. But if a finance company has only a B rating then the rate will be 1.5 percent or 150 basis points. People might think that that makes sense for finance companies but if they look at what is happening in respect of banks and building societies— 
Mr DEPUTY SPEAKER 
: There is far too much noise coming from the Government benches. I am having difficulty hearing the speaker. 
Hon DAVID PARKER 
: —they will see that there is quite a range there too. The reality is that the only institutions that are big enough to get the high rating used by the rating agencies—up around double A or better—are the very largest of financial institutions. Again we are preferring the very largest of financial institutions which happen to be overseas-owned banks over some very important New Zealand institutions like smaller building societies. I would like to see some consideration being given to changing that fee structure because I really do not think that it is in New Zealand’s long-term interest that we are giving more competitive advantage to the largest banks and disadvantaging our building societies. Thank you; overall though I support this bill. 
Bill read a second time.