Crown Retail Deposit Guarantee Scheme Bill — In Committee Third Reading 
Crown Retail Deposit Guarantee Scheme Bill — In Committee Third Reading 
[Volume:657;Page:6105] 
Tuesday 8 September 2009 
( 
continued on Wednesday 9 September 2009 
) 
Crown Retail Deposit Guarantee Scheme Bill 
In Committee 
Debate resumed. 
Clauses 1 and 2 ( 
continued 
)  
Hon CLAYTON COSGROVE (Labour—Waimakariri) 
: 
 I am delighted to again speak in this debate on clauses 1 and 2 the title and commencement. I note with interest that we are privileged to have the Minister of Defence the Hon Wayne Mapp in the chair. He has assured me this morning that unlike the Minister of Finance he will be available for exhaustive questioning commentary and analysis on this very important bill. I know that my whip may not appreciate this but I am very happy to yield to the Minister if he would pick up where last night’s debate left off and answer the myriad of questions that the Opposition put up on what is a very important bill which I have to say has the support of the Labour Party and I believe most if not all parties here. It is a very very important bill. We are here under urgency because of the nature of this bill and I see that the Leader of the House is here and that the reinforcements have arrived. The Minister of Defence is in the chair and the 25 pound howitzer is in the Chamber as well. So a military connotation is taking over this debate—the blunderbuss is on the way! 
I just reiterate a number of the questions that colleagues put up last night in this debate because we are under urgency. This is an important bill but we fail to see the Minister of Finance—but I am sure this Minister in the chair Wayne Mapp will be equal to the challenge—taking up and responding to a number of important questions that the Opposition raised. 
Hon Member 
: We did—last night! 
Hon CLAYTON COSGROVE 
: The member said that yes he did. Well she is right that last night at about 3 minutes to 10 he took I think the longest call he has taken in the whole debate. He got up and answered a couple of questions. Of course I would have thought that this deposit guarantee scheme would be very close to the Minister of Finance’s heart not just because it is the responsible thing to do which of course we did when we were in Government. At its very essence this bill guarantees the deposits of Kiwi investors as we know. We put money in the bank and the Government provides a deposit to agencies that have a BB rating and those deposits for deposit holders are secure. If it was the case for instance that someone was renting a property and getting maybe 700 bucks a week per house—as the Minister of Finance was—I am sure that the Minister of Finance as the Minister in the chair would be very very much in support of this bill which would guarantee his $700 a week deposit in a bank or financial entity that had a BB rating. 
Hon Darren Hughes 
: Even in a time of restraint. 
Hon CLAYTON COSGROVE 
: Even in a time of restraint my colleague says. I think that anybody who has discretionary income of around 700 bucks a week—perhaps on rent on a property—would be absolutely in need of a commitment from the Government of the day to guarantee that $700 per week deposit. I think that is imperative and it is interesting that the Minister of Finance of course is sponsoring this bill. I would never accuse the Minister of Finance of having some pecuniary interest in this bill because that would be unparliamentary and it would not be appropriate. 
Hon Lianne Dalziel 
: And he would declare it anyway. 
Hon CLAYTON COSGROVE 
: And he would declare it anyway as my colleague says. I just note that those people who are in the privileged position of renting out their own properties perhaps and gaining rents in the order of 700 bucks a week will sleep easy in their beds tonight as we pass this legislation. 
I ask the Minister in the chair Dr Mapp the Minister of Defence who has kindly parachuted into the Chamber whether he will answer some of the questions. Of course some of the questions pertain to why the criteria and the eligibility for the BB rating are in the hands of the Minister of Finance and not put in statute. We have asked repeatedly why that is and whether there is a risk that smaller financial institutions cannot meet the BB rating. Mr Gilmore who has been there done that climbed the mountain done everything and qualified for everything said that it is easy for a financial institution to get a BB rating and that one just sort of pays the money and people rock up—just like when he got his qualification at university; he paid his fees and they handed it out to him. 
Well to get a BB rating from a financial agency especially if one is a smaller financial institution requires a high level of commitment and cost. It is not just a matter as I said yesterday of people rocking up to McDonald’s and saying they will have the double meat hamburger and chips paying the money and getting it. For a lot of these financial institutions it is a huge commitment and the question is of course whether there will be a flight of capital if those institutions do not meet that BB rating. I said yesterday that no one wishes that on anyone—no one is predicting it and no one is wishing it—it is a question we are asking and I ask that question of the Minister of Defence. 
JO GOODHEW (Junior Whip—National) 
: 
 I move  
That the question be now put 
. 
Hon DAVID PARKER (Labour) 
: 
 I am awaiting a response from the Minister in the chair. I have made this point in the first and second reading debates on the Crown Retail Deposit Guarantee Scheme Bill and I make it now in the debate on the title clause of the bill about how we propose to transition out of the deposit guarantee scheme given the distortions that it causes in the financial markets. I repeat my concern because the current Minister in the chair Dr Mapp is not the Minister who was there last night. I raise with Dr Mapp the issue that is touched upon in the regulatory impact statement: the distortion that is caused between different classes of investments. 
The bill says one of its objectives is to minimise those distortions. That is tantamount to an admission that it creates them. The regulatory impact statement itself highlights one of the distortions that have been caused and that is in the finance company sector. Because some of the risk that is normally faced by depositors in finance companies is being taken away by the Crown guarantee the amount deposited into finance companies has increased quite substantially against a prior trend where because of perceived risk the amount deposited in that sector was decreasing. That is one distortion that we have caused; we have had an increase in finance company deposits. 
A related but different distortion is that we have seen a flight of funds away from safer investments than traditional finance companies such as investments in mortgage trusts. Mortgage trusts are where people invest their money in a trust vehicle. It can be a group investment fund or a unit trust under the Unit Trusts Act and in some cases it can be a contributory mortgage. But in all those three cases the investor is effectively investing in a first mortgage over land. The nature of investors’ security is a debt security; they are owed money. It is not nominally a debt security within the definition of the Securities Act but it is very similar to other debt securities in that investors invest a dollar amount it is secured—in this case over land—and their right to repayment is the right to repayment of the capital they are investing plus the interest that they get. Effectively that is the interest paid by the mortgagors under the mortgages. That is a far more secure sort of investment than a finance company investment yet it is not covered by this guarantee scheme. So one of the distortions we have seen under this financial guarantee is increased money going into the more risky end of the market—the finance companies—and we have seen a run on the funds invested in the mortgage trusts. They have been serious runs on funds. 
We in this Committee all know that one of the two primary reasons that we have this legislation is to ensure liquidity and protect against runs on funds. Without this guarantee scheme effectively there were concerns that there would be runs on financial institutions. We were already seeing that occur in the finance company sector and that contagion could easily have spread to the banks. Confidence is all in financial institutions and no financial institution can easily withstand a run on its funds. All those institutions anticipate having reasonably secure deposit books. We have a distortion being created and we have not yet heard from the Minister about how he plans to exit from the scheme. 
Through this legislation we have some new rules. A minimum credit rating of BB is required for anyone to participate in the retail deposit scheme and that will in itself cut off some of the smaller financial institutions. That causes another distortion that we are creating here: we are preferring large institutions over small institutions by virtue of the nature of this guarantee. Again I have a problem with that because I think that in New Zealand we are overly reliant on a small number of very large institutions. Hyman Minsky a now deceased American economist has had recent accolades for his prediction of some of the things that went wrong in the recent financial crisis around the world. He believed that financial institutions rather than being self-correcting and essentially levelling would always participate in riskier and riskier behaviour the longer the period of stability was and he was right about that. One of his other theories was that financial institutions should reflect the size of the economy. He believed that a small economy that had a lot of small businesses should have a large number of smaller financial intermediaries rather than being reliant on a small number of large intermediaries. This legislation goes in the other way from that because it gives preference to the interests of the big end of town. 
Hon LIANNE DALZIEL (Labour—Christchurch East) 
: 
 I want to pick up the point that my colleague David Parker was referring to and come back to the detailed regulatory impact statement which is to be found only on the Treasury website. I repeat how disturbing I find it that the detailed analysis that this statement contains is not available to the general public by way of the Crown Retail Deposit Guarantee Scheme Bill which is the normal place to find the full regulatory impact statement. I think that is an undesirable course of action. 
I refer to a couple of matters that are in the statement. I would like the Minister of Finance to take a call to explain them. One of the matters is directly related to an issue that we were debating last night around collective investment schemes. First of all paragraph 26 of the regulatory impact statement states that “Blanket retail deposit guarantees are generally undesirable because of the economic distortions they create.” That is exactly the point that my colleague the Hon David Parker was making. “Economic distortions include encouraging guaranteed depositors and deposit taking institutions to make riskier investment decisions since gains are privatized and losses are socialised.” This is from Treasury which actually gets the problem that we face when we privatise the gains but socialise the losses. This has a huge distortionary impact on the market and is described as a moral hazard. 
I come to paragraph 43 which states: “There is a significant degree of uncertainty associated with what could happen if the current DGS is left to expire on October 2010. This reflects uncertainty about whether and how quickly the economy will recover over the next 18 months whether financial markets will continue to stabilize and what will happen to asset prices. It also reflects uncertainty about the position of entities in the scheme the extent of likely contagion resulting from the failure of any entities in the scheme and the extent of any possible deposit flight to Australian guaranteed banks due to the mismatch of guarantee periods. The impact will also depend in a large part on depositor sentiment which is very difficult to predict.” In the report the officials say that the banks do not think there is any risk of this flight to Australian guaranteed banks. I have to ask the Minister why we are doing this. I honestly think that some larger contribution to the debate could have been made if we had had a couple of days at the select committee where we could have debated the detail with officials. I am not saying that we are opposed to it; in principle we are not and we support the passage of the bill. But we think that it is an important issue that the Minister should respond to in some detail. The strongest argument for this change is in order to match with Australia yet the very reason why we would match with Australia is not regarded by the banks as a priority in the decision making in this area. In fact according to the regulatory impact statement the banks do not support the extension of this scheme. 
Last night I was asking the Minister in the chair—who was the Minister of Finance Bill English—about collective investment schemes. I said to him that these were not dealt with in detail in the regulatory impact statement. He referred me to page 20. Page 20 is one of the annexes to the regulatory impact statement. So yes the collective investment schemes are dealt with in this particular part of the statement. But I advise the House that the detail there does not answer the question that I raise. 
Let me again read into the record what the regulatory impact statement says: “Removing this limited category of CISs from the extended DGS’s coverage would be consistent with the core coverage of the DGS. 
It would also reduce one of the boundary issues that has arisen between CISs and other institutions (such as mortgage trusts)”— this was the point that my colleague the Hon David Parker was making—“with similar legal structures (but different investment approaches) that are not covered by the present DGS and result in slightly reduced administration costs associated with managing separate deeds of guarantee. There may be some shifting of investors from CISs to guaranteed deposits but this would be minimal.” What is that based on? 
CRAIG FOSS (National—Tukituki) 
: 
 I move  
That the question be now put 
. 
Hon LIANNE DALZIEL (Labour—Christchurch East) 
: 
 The point I am making is about the claim that there may be some shifting of investors from collective investment schemes to guaranteed deposits but that this would be minimal. What is that claim based on? What have the officials based that advice on? How much shifting is classified as minimal? Why are we again allowing a potential risk to our collective investment schemes the portfolio investment entities that are all registered there at the moment when we do not what the risk is? The statement says the risk would be minimal but how do we know? What is the basis for it? 
The statement says: “Retaining CISs in an extended DGS would not cause any particular issues other than potentially raising again the boundary issues with non-guaranteed schemes. The extended DGS proposes excluding CISs in order to assist with moving toward tighter and more limited coverage.” Well that goes against the whole theory of the extension which is to allow for an orderly transition out of the scheme. I have this terrible fear we are delaying the inevitable because it will not be the case that all finance companies that are currently in the scheme will be able to opt into this scheme with the BB rating requirement that will be in place from October next year. 
I think we are entitled to ask these questions in this Chamber when debating a bill that has been introduced under urgency a bill that we did not see until it was laid on the Table of the House. We have been denied the opportunity for a select committee hearing which Treasury officials themselves recommended take place for 1 to 2 days and which would enable us to ask these questions and have a proper discussion about it. I think we have been denied the opportunity to properly scrutinise this legislation. As my colleague the Hon David Cunliffe has said on many occasions this is only framework legislation. It will allow the Minister to extend the scheme on whatever conditions are negotiated or agreed with Cabinet. I think Parliament ought to have a greater say over this legislation. 
This week is Financial Awareness Week. I am almost speechless at the way the Government celebrates the fact that a lot of investors in this country have absolutely no idea of the level of risk they are taking with their hard-earned money. The Commerce Committee is undertaking an inquiry into certain elements relating to the collapse of the finance companies. Why? Because there are gaps and clearly a lack of understanding of risk. The other thing we have seen is that finance companies that have failed have almost without exception underpriced the level of risk in order to disguise from their potential investors the level of risk they were taking with their hard-earned money. This scheme is almost saying they are off the hook for another year before they have to face up to the reality of the market in this situation. 
I have some really serious concerns about the quality of the debate around this important matter. We have seen this debate deliberately shut down on many occasions so far. The Minister of Finance has taken about three calls in the entire Committee stage of this bill and they have been very short calls pointing me to annex 2 of the regulatory impact statement on page 20 for example on the collective investment scheme and basically reading out a paragraph from the regulatory impact statement. That is not the sort of quality discussion that one would expect to occur in such an important debate. I am very disappointed in the way the Government has chosen to treat this particular issue. 
As I say the Opposition is not opposed to the concept of extending the scheme. But I think we ought to have a much clearer exposition from the Government as to why the extension is a year long why conditions have been attached to the extension and why collective investment schemes are excluded from the ability to renew their coverage under the deposit guarantee scheme when the new one comes in. The Minister has not even discussed the issues around the content of the agreement. 
STUART NASH (Labour) 
: 
 I will back up a lot of what my colleagues have said around the Crown Retail Deposit Guarantee Scheme Bill. Labour supports it for a number of important reasons. The first of three main reasons relates to the fact that at the time the retail deposit guarantee scheme was set up by the Labour Government the world was going through a period of intense financial crisis. I mentioned that the BNZ was literally days away from putting in place its crisis management strategy plan for operating a major financial institution without the ability to raise overseas funds. That was done on a Sunday evening. I think Dr Cullen worked for 48 hours flat without sleep to get it implemented and I think it was done a day after the Australians announced their scheme. It came in at pretty much the same time. The reason for that as has been outlined is that there was a belief that if the Australians had set up such a scheme and New Zealand had not then there may be a run on funds from New Zealand banks across the Tasman therefore necessitating the collapse of the New Zealand banking sector. We all know that would have been a complete and utter disaster for our economy. 
First and foremost the measure was undertaken to shore up the financial sector. That was vitally important. The second reason why we support this bill—and it relates to a lot of Part 2—is that a social cost is involved. It is disappointing because I do not think the National Government has once mentioned the social benefit of this scheme. 
Amy Adams 
: Yes I mentioned it twice. 
STUART NASH 
: Ms Adams has mentioned it. Well done. That member did it once. That must be once out of about 30 calls. Mind you members opposite have stopped taking calls to shut down this debate. But the social aspect of this is quite significant. Dr Cullen and the Labour Government made it very clear that one of the major reasons Labour was implementing this retail deposit guarantee scheme was to prevent a further deterioration in confidence in our financial sector in addition to that which existed because of the collapse of around 30-odd finance companies. It was 30 or 40; the number escapes me. It is incredible that so many New Zealanders lost so much money. 
David Parker and Lianne Dalziel talked at length about the distortions a retail guarantee scheme puts in place and that is what I will lead into at the moment. The banks are now debating their continued participation in this scheme. There is a huge difference between now and a year ago due to the nature of the crisis. Global liquidity has freed up to a certain extent. To be part of the scheme banks had to pay money so they are now undertaking a cost-benefit analysis around it. The concern I have relates to the non-bank sector. In respect of retail companies we saw a lot of savers versus investors. There is a very important distinction there. Savers are those people who are putting their money away and who have paid taxes all their lives. They have put their money away for their retirement for their children’s education or for their grandchildren’s education for whatever reason. But they squirreled away money in those companies and they have lost it. They have nothing to go back to. I firmly believe they did not price risk. As mentioned this week is actually financial literacy week. I firmly believe New Zealanders have very much a DIY attitude to their financial management which is not the right way to go about it. When they see icons like Sir Colin Meads stand up and say that an investment is as solid as houses or as solid as the proverbial— 
Hon Lianne Dalziel 
: He said: “Solid as.” And he is Sir Colin Meads. 
STUART NASH 
: I am sorry; Sir Colin Meads. He said it was “solid as” and many New Zealanders believed him without pricing risk without going through the disclosure statements and they lost their money. I believe that the shift towards finance companies has gone from savers to investors. Investors understand that their funds are guaranteed under the current scheme. Evidence of that is $880 million in deposits put into finance companies since the scheme was implemented. That is an increase of 19 percent in funds in a sector in which the deposits had begun to shrink. They had absolutely begun to shrink. My one major concern is that investors are now the main contributors to finance companies. What will happen when the scheme runs out? There are two options—two things might happen. Investors who are probably in a better position to price risk will say that investment in a finance company has now— 
Hon DAVID CUNLIFFE (Labour—New Lynn) 
: 
 I appreciate the opportunity to take a quick call on this discussion on the bill’s title and commencement. I will pick up on a couple of themes that my colleagues have raised. My colleague Lianne Dalziel has rightly raised the issue of process and the lack of consultation and she was very effective in that regard. I also realise that we have had some important discussion by the Hon Lianne Dalziel and the Hon David Parker around collective investment vehicles and the fact that they are excluded from the coverage of the bill. 
The Labour caucus has had particular concern about the status of bonus bonds. Many hundreds of thousands of New Zealanders have bonus bonds. They are an important part of investment for many small investors—rational or otherwise. Bonus bonds are excluded because they are a form of collective investment vehicle. The analysis of the bill is that 70 percent of the underlying securities are covered through various means by the intended legislation. But none the less we considered introducing an amendment to specifically list them. However we decided that it would do too much damage to the structure of the coverage and we moved away from an amendment. But I say particularly to bonus-bond holders that the Labour Opposition has specifically considered their case. 
Craig Foss 
: Declare your interest. How many bonus bonds do you have? 
Hon DAVID CUNLIFFE 
: The member will be pleased to know that I have no particular investments in New Zealand whatsoever in order to avoid just those questions. 
I will touch on a very serious theme which my colleague David Parker raised—that is the concentration of risk. There are two aspects. The first is the concentration of risk in entities that are equal to or greater than a BB rating. That will cut from the market those smaller institutions that cannot make a BB rating. We welcome the Minister back into the Chamber. Many of those investment holders will move to larger institutions primarily the banks. The big banks will increase market share at the expense of small companies. Big banks already hold 95 percent total market share as reflected in the premium stream. That is the first aspect; that is one side. 
The second aspect of concentration of risk is the source of the funds. Ten years ago about the time I entered Parliament inbound foreign investment to New Zealand came roughly equally from five sources—Australia the United States the United Kingdom Asia and all others. Now 80 percent of it— 
Hon Lianne Dalziel 
: I raise a point of order Mr Chairperson. I am sorry to interrupt my colleague but I thought the Standing Orders require the Minister responsible for the bill to be in the chair when he or she is in the Chamber. 
The CHAIRPERSON (Hon Rick Barker) 
: I call on the Hon David Cunliffe to continue. 
Hon DAVID CUNLIFFE 
: Thank you. We welcome the Minister to the chair. He has checked his numbers this morning and found they are still there which is good. It must be a trying time for his camp but we wish him well. 
Ten years ago investment was from five sources; now 80 percent of it comes from one source: Australia. That situation has pros and cons. The pros are that we are fortunate that the Australian banking system is the soundest in the world. A large share of the world’s triple A rating banks reside in Australia. That is a good thing. 
Craig Foss 
: Most sound. 
Hon DAVID CUNLIFFE 
: The Australian banking system is the most sound in the world as my colleague says which is to be welcomed. I am not going on a roo hunt here but I am worried about strategic concentration of risk wherever that risk came from. When one has all one’s eggs in one basket one becomes rather more dependent on the basket. The fact is that when 80 percent of our inbound foreign direct investment comes from one country we run the risk of what they call in economics the marginal market phenomenon. They are much more important to us than we are to them. 
In the banking inquiry a very interesting fact came to light which was that approaching 30 percent of the book debt of the four big banks in Australia is now denominated in New Zealand dollars or New Zealand securities. It is the old phrase that when one owes the bank $100 one has a problem and when one owes it $100 million the bank has a problem. Surprise surprise! Australia is starting to worry about the systemic risk of its investments in New Zealand. That is why in the last 2 weeks we have had the call from Australia from Ralph Norris to merge our regulators and to have the Australian Prudential Regulation Authority take over financial supervision in New Zealand and we have had John Key fly the kite of a common currency. Make no mistake: when the Prime Minister says that we want to adopt someone else’s currency he is not doing it by accident. He did not wake up one morning with a rush of blood to the head. 
AMY ADAMS (National—Selwyn) 
: 
 I move  
That the question be now put 
. 
A party vote was called for on the question  
That the question be now put. 
Ayes 69 
New Zealand National 58; ACT New Zealand 5; Maori Party 5; United Future 1. 
Noes 53 
New Zealand Labour 43; Green Party 9; Progressive 1. 
Motion agreed to. 
Clause 1 agreed to. 
Clause 2 agreed to. 
House resumed. 
Bill reported without amendment. 
Report adopted. 
Third Reading 
Hon BILL ENGLISH (Minister of Finance) 
: 
 I move  
That the Crown Retail Deposit Guarantee Scheme Bill be now read a third time 
. We have had a reasonably wide-ranging debate on the bill and that was always likely to be the case despite the fact that the bill does not have a lot of the detail of the scheme in it. The Committee stage gave members the opportunity to work through most of the substantial issues that had been considered in bringing the policy together. 
The Opposition in the spirit of cooperation around this particular issue that we have followed for the last 12 months or so raised a number of quite reasonable points. I will respond in a very general way. A lot of the points that members of the Opposition made had merit. The Government made judgments on issues to do with coverage pricing and product exclusions based on the principle that we want to move back to normal market conditions in a reasonable time. I thank members for the quality of that debate. 
I will just remind the House of the general principles that are driving this bill. First we want to ensure that depositor confidence promotes system-wide financial stability. One of the advantages the New Zealand economy has enjoyed over the last 12 months is that it has retained financial stability. In part that is to do with the fact that although they were vulnerable our Australian banks were in good shape when the financial crisis came along. That was partly because of actions taken by the previous Government in installing the guarantees to ensure that confidence in their stability was maintained and partly because the wide range of tools that the Reserve Bank supplied to the financial system enabled it to get through the period of crisis into a period now of relative stability. 
The second principle driving this legislation is the need to minimise economic distortions and ensure well-priced credit markets. There is no doubt that the guarantee does create some distortions and an obvious one is the fact that deposits into our non-bank deposit taking sector actually grew or have grown during the time of the guarantee. I think anyone would say that in the absence of the guarantee that might not have happened. We need to reflect on the fact that one of the reasons for the financial crisis was mispriced credit risk. That is why it is important that in responding to the financial crisis we do not perpetuate for longer than necessary distortions in credit pricing. It is really important that we revert to normal market conditions where people who are making deposits and making investments are facing a realistic trade-off of risk and return. That is another principle behind the bill. 
The third principle is the need to do our best to ensure a viable non-bank sector in the future. A number of speakers through the Committee stage stressed a point that I think is important about how the four Australian banks dominate our financial intermediation. A large number of businesses and activities in New Zealand are not the natural customers of those banks and therefore the non-bank sector is important. One of the principles is to ensure that the non-bank sector consolidates and rationalises itself in a way that means at the end of the guarantee we have places where people can go to borrow money for their ditch digger truck or other business need that a bank will not necessarily respond to. I would keep in mind though that because of that demand it is likely that other players will come into the non-bank market. 
Finally we want to manage the Crown’s exposure in terms of fiscal costs. Any institution that fails under this guarantee imposes a cost on taxpayers and taxpayers deserve their interest in these institutions to be looked after with due care. That has ruled out options such as unilaterally or quickly withdrawing the guarantee in a way that could put taxpayers in the position of paying out hundreds of millions of dollars to institutions that fail. Those are the same hundreds of millions of dollars that we need to run our health services police force and schools so we are keen to ensure that the Crown and the taxpayer enjoy the potential benefits of an uplift in the economy where asset prices stabilise where confidence grows and where there is a realistic opportunity that these guarantees will not be realised. I commend the bill to the House. 
Hon DAVID CUNLIFFE (Labour—New Lynn) 
: 
 It will come as no surprise to the public if I reiterate that Labour will be supporting this bill. We do so because we believe firstly that it is appropriate for us to have framework legislation that provides powers to the Minister to bring down policy in this area and to regularise what was necessarily done by emergency or reserve powers under the Public Finance Act after Parliament was prorogued just before the last election. The process we are going through is broadly appropriate; therefore we support it. 
It is right as has been said by the Minister of Finance who has just resumed his seat that this has been a wide-ranging debate. It is right for two reasons. Firstly as my colleague the Hon Lianne Dalziel has been at pains to point out unfortunately there has been no select committee process which I think is both unfortunate in itself and becoming a hallmark of this Government—that it considers that the standard safeguards of democracy are somehow pliable or dispensable. 
We have a regret that in consultation on this bill we did not perhaps make even clearer our concern that there should be an opportunity to more formally question officials and to give members of the sector and of the public the opportunity to raise their issues because although the Reserve Bank and Treasury have been talking to the institutions that is far from the public view. So I guess we go into this third reading debate with an enduring sense of having missed something important along the way. 
I want to firstly recap briefly the Minister of Finance’s summary of the justification for the bill because I think he has encapsulated quite well the rationale. In recalling from our first reading debate the broad scheme of this was that there were three options. Having got the scheme in place we could go cold turkey and let it expire at the end of next year we could have a limited extension with limitations around risk and distortion—which is what the Government has chosen to do—or we could transition gradually to a permanent deposit guarantee scheme which would have some enduring advantages for deposit holders. That is something we believe that the Government rightly still has in consideration. We commend that work and we look forward to a good bipartisan discussion on it. 
Within that the Minister has reiterated three rationales for taking the middle course. We think the middle course is the right course but we have some questions about the nature of the rationale. The first one was system stability. Of course system stability is important and the Minister was kind enough to acknowledge that it was supported by the original retail and wholesale guarantee schemes that the then Labour Government put in place. I reiterate by acknowledging that it is also being supported by the strong presence of the very stable Australian banking system in New Zealand—and that is to be welcomed. It was not caught up in the derivatives-driven mess of Wall Street in the northern hemisphere and it does provide some of the largest share of triple A rated banks in the world. We are fortunate that our system does not suffer from financial stability risk. Where we part company with the Government on this point however is that an acknowledgment of overall stability should not be an excuse to turn a blind eye to second-tier risks and longer-term issues that will be of strategic importance to this economy down the track. Our responsibility is to provide not only for stability today but also for sovereignty tomorrow. It is in those issues that we believe a level of concern is shared by many New Zealanders. 
The minimisation of distortion is important and we agree that part of the seeds of the bursting of the global finance bubble was in the masking of risk through other instruments than we are considering today—things like real estate - backed securities collateralised debt obligations and derivatives which are a different story and not about this issue. But we agree that it is prudent to have some limitation around risk. The line has been drawn here at a credit rating of BB. We believe that there are arguments on both sides of the House. My colleague David Parker has been eloquent in setting out the pros and cons of that line and the fallout for members of the non-bank finance sector that by very issue of scale as opposed to inherent portfolio risk are either too small or cannot stand the transaction cost of getting rated. 
The Minister responded that they have to anyway for other reasons down the track. That does not change the fact that there will be fallout from that market in addition to the fallout that has already occurred and from that we will see a further concentration of that market. That is where we think the Government is on the weakest ground. We would like to have further discussion to help it out on this. The Minister said: “ensure a viable non-bank market”. That is where we believe most of the risk is here. At the end of the Committee stage debate we were coming on to the issue of concentration of risk not only by type—95 percent in major banks—but also concentration by source of funds about 80 percent from Australia into our market and by sector largely into real estate largely fuelling the housing bubble. 
There are some huge issues there for Parliament the Government and Opposition to work together on in the public good to first avoid a further housing bubble and collapse and second to avoid us becoming pawns in somebody else’s banking game and to ensure that New Zealand has a diversity of sources of funds from many different lenders. We must do that so that we are insured against the marginal market problem—that is when you are a very small borrower from a very big person and that person does not need you. Of course the irony is that latterly we are starting to see the emergence of a different issue in that Australia is looking at New Zealand and saying: “Goodness me! You’re about or coming up to a third of our risk pool and you might be riskier than some of our onshore assets. We’d like to take a closer look at your regulation.” Australia might ask the Australian Prudential Regulation Authority to oversee our financial system. 
It is there that we come whether we like it or not to longer-term questions of sovereignty. Those are the issues that in addition to the pass through of interest rates the parliamentary banking inquiry uncovered in the last several weeks and we believe on our side of the House that that was an extremely worthwhile exercise. We had 50-odd submissions despite the work of the Beehive to shut the inquiry down—and I hate to be so harsh but there is no other way to put it. The Beehive tried to roll its own members to vote against the inquiry taking place after the members had proposed a very worthwhile exercise in the Finance and Expenditure Committee. That was our first preference and where it should have happened. 
I really want to thank the Green Party and the Progressive party for working very cooperatively in inviting all other parties in Parliament but where was the Maori Party? It purports to represent people who have interests similar to Labour’s own people—the ordinary folk of New Zealand. We would have welcomed the Maori Party being there. Where was the ACT Party? It has clear views about financial regulation and speaks a lot of sense from time to time. It would have made a contribution. But oh no! The word went out from the Beehive: “Thou shalt not play.” And the word went out from the Beehive to the boardrooms of the banking sector and they stayed away—some of them. Some of them like Kiwibank in particular and groups like Federated Farmers the Manufacturers and Exporters Association the Productive Economy Council—and even the Employers and Manufacturers Association (Northern) goodness me—had the courage of their convictions and said: “Whether you like it or not these issues affect our members.” I commend them for coming along to the inquiry and I am confident that with the further research that is going on we will have a very substantive contribution to make to the ongoing debate. 
In conclusion and coming back to the substance of this bill this is framework legislation. It provides the power for the Minister to bring down by regulation through the Gazette the policy that he has announced in the last couple of weeks—that is to extend by 1 year the retail deposit guarantee scheme. In so doing we can understand that that is the middle option between three and broadly we support both the process and the strategic option shown. But significant issues have arisen in this debate around the lack of consultation the lack of public disclosure of issues the concentration of risk the fallout for the non-bank finance sector the risks around the exclusion of collective investment vehicles and as the Opposition has been at pains to point out the error in our view of allowing the major banks to opt out when they represent 90 to 95 percent of the coverage 90 to 95 percent of the revenue stream to the Government by way of premiums for this retail deposit scheme. The beneficiaries of the wholesale deposit scheme should be in the retail deposit scheme. That in our view was a strategic error. It will result in cherry-picking and it will result in a concentration of risk. 
CRAIG FOSS (National—Tukituki) 
: 
 I am glad the House is finally on the third reading of the very good Crown Retail Deposit Guarantee Scheme Bill. First of all I acknowledge the support across the House for the bill and the contributions of members particularly those of the Hon Lianne Dalziel in the Committee stage. She talked about the regulatory impact statement and raised some very good questions in and around it. I acknowledge also some of the questions of some of her colleagues. 
One point that kept being raised was why the bill was not referred to the Finance and Expenditure Committee. I note again that the original decision made by the previous administration to bring in the retail deposit guarantee in the first instance did not ever go before the select committee. 
Hon David Cunliffe 
: Parliament was prorogued. 
CRAIG FOSS 
: It was an election period. 
Hon Lianne Dalziel 
: Parliament was not sitting. 
CRAIG FOSS 
: That is quite correct but even after that it did not go before the select committee when the new Parliament was confirmed. But there were plenty of opportunities for members opposite to ask the finance Ministers and Treasury at various stages as part of reviews about this particular question. In fact many members did ask about it at the select committee. 
Also there are market sensitivities around this type of bill. I refer to equity prices and debt prices and to whether an extension of the guarantee is assured particularly for the lower-tiered and lower-rated institutions which many members opposite say they are concerned about. Providing certainty as far out as possible is the best thing. I struggle to see why some members cannot see that. After the Royal assent—let us say that occurs on 15 or 16 September—any institution can voluntarily join and basically have the deposit guarantee for another year subject to terms and conditions and that will allow them to do term funding. As many members will have noticed there is a wall of funding maturity occurring in October next year and this bill starts to address that issue. 
There is one thing I cannot let go. The previous speaker talked about risk as did many speakers on the other side of the House. Under the previous Government the most wealth-destroying regime in New Zealand’s history about $9 billion to $12 billion was wiped off the Crown’s balance sheet. Members opposite should not get up prophesy and dictate to us about risk when their track record is not very flash. The losses included $7 billion to $9 billion from superannuation $2 billion to $3 billion from accident compensation about $1 billion from the National Provident Fund and $1 billion from the railways. Those members should not get up and talk about risk and risk management. Well I guess they can but they should declare what their track record is. Under the previous Minister of Commerce depositors in various finance companies lost about $1 billion. That is not the individual’s fault; of course it is not. Those members should not get up and dictate to the House about risk and risk management when their track record is very very shabby. I do not imagine that the previous Government’s track record of risk management will ever be repeated for a long long time. Certainly in the history of this country it had never been seen before. About $8 billion to $10 billion was wiped off under the previous Government’s watch. 
A couple of points were raised during the Committee stage. Members opposite talked about the exit strategy—how institutions will transition out of the new extension. They seem to forget that it is voluntary. How will institutions transition out? I go back to the original scheme. It would have stopped on 12 October 2010; it would have stopped cold turkey on 12 October 2010. Look at the funding maturity occurring in early October 2010. The scheme was to have gone cold turkey then. If this bill is not passed—hopefully it will be—the scheme will stop cold turkey. Liquidators and receivers will be in there by the dozen simply because of the inability of the institutions to get themselves out of the current funding and liquidity trough. Members get up to ask questions about the transition phase but this measure is the transition phase out of the existing rules. It is quite simple. It is prudential it is common sense it better prices the risk and it is voluntary. I know that is a point the previous speaker has issues with but it is voluntary. From the point of view of the Government of the Crown accounts this measure is a very good option. If the recession continues and/or worsens it is there; it is virtually the status quo. If the economy improves then the downside for taxpayers who have underwritten all these liabilities is very much diminished to the tune of tens of billions of dollars. In that context it is a very very good transitional measure out for the taxpayers of New Zealand. 
Another speaker on the other side of the House seemed confused about what is insured. It is retail deposits under $1 million that are insured under the current scheme. Yes the limit is going down to $500000 but it is not the shareholders’ equity that is insured. Yes the scheme helps institutions but it is not their equity that is insured. If we want to test that we should look at the share prices of institutions both in this country and in Australia since the scheme came in and see whether they have gone up or down. Share prices have actually plummeted. Again the shareholders’ equity in those institutions the asset valuations are not insured; they have nothing to do with this scheme. It is deposit insurance only. 
Mr Norman spoke yesterday and Mr Cunliffe picked up some of his points as well; I guess Mr Norman will give another speech in a minute. Their solution seems to be to nationalise everything to internalise all banking thereby forgetting that New Zealand owes $130 billion to the rest of the world and forgetting that in 2000 it was about half that amount. Those members are trying to forget the last few years of history. If we take the content of some of those speeches to their logical extreme they think that if we fix the exchange rate somehow fix interest rates and bring in reserve asset ratios—from the book of Muldoon—then everything will be fine! It just does not seem— 
Hon David Cunliffe 
: The Reserve Bank’s doing it; it’s called Basel II. 
CRAIG FOSS 
: I note that the member who is interrupting has another solution which is to potentially increase the tax rates on portfolio investment entities. He was quoted in the  
National Business Review  
about that recently. Is that a solution or not? I do not know; I am quite happy for the member to clarify that. I am sure I saw an article about it in the  
National Business Review 
 recently. 
Quite frankly given the track record of the previous administration and the track record of many of the speakers opposite who had ministerial warrants or were associated with the finance part of the previous administration for them to get up and dictate and preach about risk and risk management is very very hollow indeed. The numbers do not stack up. I appreciate and agree with their concerns about the vulnerability of the New Zealand financial system but when they start talking about our losing our sovereignty to Australia and things like that I look at the fact that we are continuing discussions that started under the previous administration. Discussions relating to the back office and the regulatory regime involving the Australasian Prudential Regulation Authority and the Reserve Bank of New Zealand Treasury discussions and ministerial discussions are all continuing. Those members should take pride in the fact that they started to try to coordinate the back-office and regulatory arrangements with Australia. Much of the legislation that came in under the previous Minister of Commerce in terms of non-bank deposit takers looked at what happens over in Australia. Members should take pride in that rather than scaring the horses about something that just does not exist. 
This is very very good legislation. It is a transition out of a very awkward situation that all members acknowledge. I for one hope this country does not ever get into a situation where such a guarantee in such unusual circumstances is needed again. 
Hon DAVID PARKER (Labour) 
: 
 Before addressing the bill it behoves me to respond to some of the comments made by the member who has just resumed his seat the chairperson of the Finance and Expenditure Committee National’s Craig Foss. I would have thought that that revisionist view of history was beneath him. It is plain that when the last Labour Government took office Government debt was 39 percent of GDP. When we left office it was 17 percent of GDP. Net debt was virtually nil—for the first time in New Zealand’s history I understand. So far from leaving the books in a poor state we left them in a very good state. During the period of our tenure New Zealand’s growth rate was higher on average than that of Australia the United States Europe and Japan. So on the growth front we did better as well. 
During the period of the Labour Government we built up savings to fund the future bulge in superannuation. We established what is colloquially called the Cullen fund—the New Zealand Superannuation Fund—which now has over $10 billion of savings in it to go towards superannuation in the future—contributions to which of course have been suspended by the current National Government which is another example of its mismanagement of the economy. 
Mr Foss’ contribution and criticism needs to also be reflected upon in the context of the fact that the Opposition is supporting this bill. I am afraid that Mr Foss having served that up will have to take a little bit back. The reality is that we expect judgment to be shown by the Government and judgment to be shown by the Minister of Finance. When he makes those sorts of accusations against us I am afraid he will find it coming flying back because the headline of today’s paper shows that his Government is a Government without ethics—“Fresh housing woes for English”. Mr English was trying to line his own pocket and he showed terrible misjudgement in his personal dealings in respect of something that was going to privately profit him. So the member should not come here and lecture us about ethics when there is that sort of thing on the front page with the Minister in charge of this bill. 
I want to return to the topic which is the financial stability that is ensured through this retail deposit guarantee scheme. Mr Foss misrepresented my colleague the Hon David Cunliffe’s comments about this being compulsory or voluntary. We have never suggested that it ought to be compulsory. The point he was making is that if an institution is going to pick up the wholesale guarantee it should pick up the retail one as well. Otherwise we are saying that we need the guarantee for the big fellas who are lending to New Zealand from offshore hundreds of millions or billions of dollars but ma and pa investors who are only investing $1000 don’t get the benefit of the guarantee. That is the point the Hon David Cunliffe was making and it should not be misrepresented by Government members. 
Another own goal by Mr Foss was that he said the prior instrument was introduced without a select committee. Of course it was; Parliament was not sitting. Parliament had risen for the last election so it could not go to a select committee. In response to that little faux pas Craig Foss said off the cuff: “Oh well of course it could have gone to a select committee straight after the election.” He is right but National was the Government by then so how that was the Labour Party’s fault I am not quite sure. I think that is 3 nil so far to the Labour Party; they were all own goals by Craig Foss. 
I return to one of the other issues that my colleague the Hon David Cunliffe touched upon because it is a concern both he and I share. It relates to overall financial stability and the size of our financial institutions. I want to place on record as the Hon David Cunliffe did that we are fortunate to have a stable banking sector in no small part because of the strong major Australian banks. I am not criticising them as entities but their interests do not necessarily always coincide with New Zealand’s interests. I am concerned that the fee structure and the limits to the ambit of the scheme are set out in a way which again prefers the big end of town. The major banks have a lower fee structure because by virtue of their size and the scale of their businesses they are more likely to get a high credit rating than a smaller financial institution. One of New Zealand’s problems is the concentration of our finance sector in four main banking institutions. That is a long-term problem for New Zealand in terms of both the effect it has on New Zealand credit markets and the effect it has on our current account deficit through the repatriation of profits of those banks the combined profit of which is bigger—and correct me if I am wrong Mr Cunliffe—than the total profit of the rest of the New Zealand stock exchange put together. That is an enormous issue. The profits in total of the four big banks are more than the whole of the New Zealand stock exchange. Further cementing the advantages that those main banks have over smaller New Zealand competitors is not good policy because it further entrenches that advantage and will see them grow their market share further. That is one of the distortions that is extended by this guarantee scheme. 
We support the scheme because we do not see that there is presently a better option. We concede that we need a retail guarantee scheme and we think it should be compulsory for those who have bought into the wholesale scheme but otherwise it should be voluntary. But we think that the fee structure is in some ways wrong in that a large Australian institution gets a lower fee structure than a New Zealand building society despite the fact that the risk profile of a New Zealand building society is quite low. I think that that is a problem. 
I am quite attracted to some of the writings of Hyman Minsky an American economist who died about 10 years ago. He predicted some of the difficulties we have seen in financial markets around the world. There were two main parts to his theory. The first was that the longer the period of financial stability the more risk taking we see on the part of financial enterprises. That is true. They forget the last cleanout they chase a higher market share and they want to justify the huge bonuses the chief executives get so they embark upon more and more risky transactions. They try and get around existing regulations by doing transactions that are off-balance-sheet in terms of the regulator. He said that that means there would be a constant update of regulatory oversight and he was right. That is one of the problems we have seen internationally. It allowed a lot of those large financial institutions to engage in transactions that were outside the regulatory package that related to their equity requirements and therefore they were able to embark upon very risky transactions while pretending that they were low-risk institutions. 
The second part of Hyman Minsky’s theory which I think is also sound is that financial enterprises ought to be of a size that reflects the size of the actors in the economy. He said that we ought not to be reliant on one two three four or five large institutions to an undue extent; we ought to have a healthy competitive array of financial institutions and they need to be in the bank and the non-bank sector. One problem this guarantee scheme causes is that some of the non-bank scheme is hampered. One of the reasons this ought to in my view have had a little bit more scrutiny is that although the regulatory impact statement says that one of the problems has been to encourage more risk-taking investment—because it has encouraged people to think that investing in finance companies is low risk because of the presence of the Government guarantee—we have not had information as to what the deleterious effect has been on other parts of the non-bank sector. I know that many hundreds of millions of dollars—if not billions; I do not have the information and I cannot get it because there is no select committee process—worth of funds have fled from other parts of the non-bank sector that are not covered by the guarantee scheme. Rather than encouraging the spread of financial institutions and the growth of a range of financial institutions including in the non-bank sector the guarantee scheme has the effect of concentrating the size and the market advantage of our existing major participants and that is not good. 
I think that is a real issue for New Zealand for the future. It is an issue not just related to the current account deficit but also to the control of the economy economic sovereignty and the proper functioning and efficiency of credit markets. We need more smaller institutions. Having said that the Labour Party supports this legislation as being necessary. 
Dr RUSSEL NORMAN (Co-Leader—Green) 
: 
 I stand to speak on the Crown Retail Deposit Guarantee Scheme Bill. The Green Party will be supporting this bill. We think that it is essential to maintain long-term stability in the financial sector. 
The only reason we are here today is because of the global financial crisis. The only reason we have to deal with this bill is because the “masters of the universe” as they like to call themselves just collapsed the global economy. The reason taxpayers have to underwrite the banking sector both in wholesale and retail and the reason taxpayers have to underwrite the global financial system is that the people who were running it collapsed it through mismanagement poor management and genuine greed. They collapsed the global financial system and hence collapsed the global economy. 
In New Zealand we have a particular problem. Our problem is not the same as the problems that are found elsewhere in the world. Fundamentally our problems revolve around the distortions that are present in the tax system and in the economic system that encourage investment in property rather than in the productive sector. That is the fundamental problem we have; it is quite different to some of the problems elsewhere in the world. New Zealand has a very specific problem. 
Some of the evidence we received during the bank inquiry underlined that problem. I want to point to a few statistics around it. Over the last 9 months—during 2009—the banks have loaned another $3 billion into the housing market which takes it up to around $165 billion. At the same time lending by banks to businesses slumped by about $3 billion. Over the last 9 months of this year lending into the housing market increased by $3 billion while lending to businesses decreased by $3 billion. To me this epitomises the problem that we have. We have a banking system that is accustomed to and is entirely comfortable with loaning into the housing market. It is what it does well. But we do not have a banking and financial sector that is good at supporting New Zealand businesses. It is not as easy to loan to a productive enterprise working in the tradable sector as it is to loan on housing. The banks do not do it. In fact over the course of the last 9 months of this year they have taken $3 billion out of New Zealand businesses and loaned another $3 billion into the housing sector. 
The incentives around the financial system are wrong: we are incentivising investment into the non-productive part of our economy. The cost of that is enormous. The social cost is enormous. Housing is tremendously expensive in our country and it is now very difficult for people to get into the housing market. Housing consumes a vast amount of people’s income: they have to pay their mortgages and their rent. We have set up incentives that are not good for the New Zealand tradable sector or the New Zealand productive sector and that at the same time inflate the housing market. 
If we look at what those incentives are we see that the incentives around the tax system in particular encourage investment in property. The reason is that by investing in property one can offset the losses on those investment properties against one’s taxable income. One of the most commonly used mechanisms to do that is the loss attributing qualifying company. Losses on loss attributing qualifying companies increased from $750 million in 2003 to $2.3 billion in 2008. We have set up a system that is encouraging people to invest in investment properties and use the losses on those investment properties quite lawfully to effectively offset their income tax so the taxpayer ends up picking up the tab. People are doing it and banks are loaning into the housing market. We have a tax system that encourages the banks to loan money to people so that they can buy investment properties. They can then offset the losses on those investment properties against their tax. We have established a stupid incentive scheme. It is bad for the New Zealand productive sector. It is bad for the New Zealand tradable sector. In the long run it is extremely dangerous to the New Zealand financial system to lock up billions and billions of dollars into an overinflated housing market. We have set up a bad system. 
If we want in the long run to guarantee the stability of the financial sector which this bill is ostensibly designed to do and if we are serious about doing that we need to address those underlying incentives. The Greens have been criticised because we want to change the tax incentives around housing and investment property but I ask what the alternatives are. We currently have a series of incentives that encourage speculation in housing. We should change those incentives. We know what is involved. We know that we can introduce a capital gains tax excluding the family home. We know that we can ring-fence the losses on investment properties. These policy measures are available to the Government if it has the courage to do what is in the long-term interests of New Zealand—what the Government knows is in the long-term interests of New Zealand. It is worried about short-term political risk because it has a short-term approach I guess. But one has to look at the long-term interests of the New Zealand economy. We cannot continue to throw all of our money into housing while businesses are starved of the money they need to make investments to support productive enterprise in our country. 
The tradable sector is under pressure constantly because the Reserve Bank tries to control inflation by increasing interest rates. The Reserve Bank should be cutting the official cash rate tomorrow. One of the concerns of the Reserve Bank—and why it may not cut the official cash rate—is what will happen to the housing market. If interest rates are low then the housing market will start to bubble again and it knows that is a problem for inflation. Why do we not have additional tools to target the housing market so the Reserve Bank can cut the official cash rate make capital available to businesses and at the same time target the asset bubble in housing so that more inflation does not come out of the housing market? 
We can adopt those tools; this Parliament can adopt those tools. It would be good for New Zealand businesses. It would be good for New Zealand households in the long run to have stable housing prices. We just have to have the courage to say to people that we know they have made legal investments in investment properties and we totally understand why they did it but the long-term interests of our country means we have to make the decision to ring-fence those losses and move away from that system we set up. It is in our children’s interests so that they can have affordable housing. It is in the interests of our children as well so that they do not inherit a massive overseas debt that is being used to fund speculation in the housing market. We are handing over to the next generation a net international investment position of negative 100 percent of GDP. That is what we are passing on to the next generation. We have the choice to change direction. We have dramatically increased the level of overseas debt in order to fund housing speculation. We have housing speculation because of the tax rules. We can change the tax rules. It is within the power of this Parliament to act in the long-term interests of the New Zealand economy and the New Zealand people and change the rules. 
I call particularly on Government members to embrace their responsibility. Over the course of however long their term of Government is they will never be in a more popular stronger position than they are now. We can all read the polls. The Government is in a very popular strong position. Government members should use that popularity and strength to do what they know is the right thing for the New Zealand economy. Even though they know some political risk is associated with it in the long run they know it is the right thing to do. We all know it is the right thing to do. We cannot continue to borrow to pay the interest on previous borrowings. That is the route to destitution. A country that continues to borrow to pay the interest on previous borrowings is destined to have an economic crisis. We all know that. The Minister of Finance says it every day. We have the opportunity in this House to make the changes that we all know need to be made. I call on the Government to do the responsible thing and make the changes. 
Touching very briefly on affecting reserve ratios it is true as Mr Foss says that in some ways it is an old-fashioned idea but we have a specific problem. We need to look at reserve ratios particularly loaning into the housing market. If it is a way to try to constrain the flood of foreign capital that is being channelled by the banks into the housing market I think we should consider it. We have a major problem. We should not put things off the table just because they have been done before and are associated with a former National Prime Minister. We should consider all options because we now have a major problem. In order to protect our sovereignty housing affordability for future New Zealanders and the productive sector of the New Zealand economy we need to look at all of these measures in order to control that housing asset inflation so that we can get on and assist the tradable and productive sectors. This bill is part of that and we will support it but we need to go beyond the bill. 
JOHN BOSCAWEN (ACT) 
: 
 I start by addressing some of the issues raised by the Opposition about the Crown Retail Deposit Guarantee Scheme Bill. Opposition members talked about the growth in the finance company sector as a result of the guarantee that was introduced last year. They said deposits into the finance company sector had been declining but following the introduction of the Government guarantee last year those deposits had taken a turn and were now going upwards. 
The first point is that we need to acknowledge that it is good to have a very strong secondary market beyond the banks in the non-banking sector and to use the words of the Minister of Finance to have someone to fund the diggers and the trucks. I ask Opposition members why they would not expect deposits to grow. Of course we would expect them to grow. Since the guarantee was put in place 12 months ago for a 2-year term anyone lending to a finance company was basically lending to the Government. People were lending to the Government for a period of up to 2 years; as long as their deposit did not go beyond I think 14 October 2010 they were lending to the Government. 
The guarantee that was put in place did not actually cost most finance companies anything because the guarantee was priced on a figure that was based on a margin over a company’s loan book at the date plus a 15 percent margin. If a finance company owed its depositors and equity holders $100 million and had invested $100 million it was able to get the benefit of a Government guarantee for free as long as its loan book did not exceed $115 million—so the base loan at the date the guarantee was introduced plus a 15 percent margin. 
I thought that the Hon Lianne Dalziel gave a very interesting commentary on this bill and I accept her concern that it was introduced at a very late stage. The Labour Opposition has a genuine reason for expressing disappointment that it was not given copies of the bill earlier. But Lianne Dalziel talked about privatising the gains and socialising the losses. It was the guarantee put in place by the previous Labour Government that privatised the gains and socialised the losses because although there was a need for a guarantee and although it was put in place because of international circumstances it could have been priced entirely differently from how it has been. It would have been quite possible to put a pricing structure in place that had the finance companies paying for the benefit of what they got. In essence the previous Labour Government gave a free gift to the owners of those finance companies. It was the Labour Government that ensured the gains were privatised. 
I say that because within a day of the guarantee being put in place on that Sunday on the Monday I had emails inviting me to invest in various institutions. I was told the investments would meet the requirements of the Government guarantee and I could invest in a particular institution and earn an interest rate of 7 8 or 9 percent—and many people did. The finance companies were flooded with money and that is why we had a growth in deposits. Those companies would have moved to drop their interest rates had they needed to pay the full price of the Government guarantee. So of course there were distortions and those distortions were generated because of the structure that was put in place. 
Hon Clayton Cosgrove 
: So were you against our guarantee? 
JOHN BOSCAWEN 
: No I am not against the Government guarantee I say to Mr Cosgrove. What I am concerned about is the way that it was priced. If there was any reason to privatise the gains and socialise the losses it arose from the way that the previous Labour Government priced the guarantee. 
Let me move on. The Hon Lianne Dalziel made the very good point that a lot of investors have absolutely no idea of the risks they are taking. I want to come back to an issue that I raised in this House last night and to talk about one particular finance company. That company is Strategic Finance. That company went into a moratorium. It had its bondholders its note holders and its debenture-holders vote for a moratorium on 22 December 3 days before Christmas last year. The company owes roughly $400 million to its debenture-holders and its creditors. On 15 July this year Strategic Finance announced that it anticipated making a loss of $98 million and that was reported in the  
New Zealand Herald 
. But the report went on to say that the loss might be bigger than that as the company was still discussing its accounts and was yet to finalise them with its auditors. Strategic Finance stated rather surprisingly: “It is the Board’s assessment that the provisional full year results have no impact on the forecast repayment of 100 cents in the dollar of principal and all interest to depositors debentureholders or the prior ranking BOS International (Australia) facility.” It announced what amounted to a loss of a quarter of its loan book but it said that would have no impact. 
Ten days ago Strategic Finance said the accounts were out the auditors had signed the accounts and it now looked as though the loss was $180 million. That is double the earlier anticipated loss. The company owned up to its investors and said it will not be able to pay out 100 percent of their invested funds to them. It said it looks as though the amount will be from 85 percent to 93 percent. If ever there was an example of investors slowly being let down then this was it. On 22 December voting for a moratorium was held where investors were promised that the base-case projection was that there would be full repayment of principal and interest. In July of this year they lost a quarter of their investment and by the end of August they had lost half of it. 
But the situation is worse than that. There is at least one transaction—there may be more but I have been advised of one—where the money lent by Strategic Finance on a second mortgage was in two tiers. There was a priority second mortgage and then the regular second mortgage. Part of that advance has been lent from funds raised from a privileged group of people who have prior rights to repayment of their money over other contributors to that second mortgage. That group of people also have prior rights to payment of their interest so they have priority as to security and interest. I understand that some of the people who contributed to the top part of that second mortgage were still being paid an interest rate of 17 percent up until quite recently. 
The tragedy of it is that the mums and dads the people who do not comprehend the risk they are taking the people whom Lianne Dalziel referred to when she said that such investors had absolutely no idea of the risk they were taking—all those people—rank in the bottom half of that second mortgage. Essentially it is a third mortgage. The first mortgage is to the Bank of Scotland International as the moratorium refers to; the second mortgage is to a priority group of people; and the rest is to the mums and dads who will get what is left. When markets move down and a company says property values are dropping I ask who misses out? It is always the people at the bottom. 
I am very concerned that regular mums and dads the investors in Strategic Finance will get far less than 85c in the dollar. I say this because the trustee of Strategic Finance Perpetual Trust Ltd is now in the gun. It has to make a decision as to whether it moves to put Strategic Finance in receivership. If it chooses to continue with the moratorium I believe that matter needs to go to a court. I believe Parliament needs to pass legislation to provide that a company cannot simply go for a roll over of its moratorium. There has to be accountability. Independent experts have to take a closer look at the projections because surprisingly in the year to June 2008 Strategic Finance paid a dividend to its shareholders yet 13 months later it said it had lost $200 million. Clearly had those losses been known at the time no dividend would have been paid. 
This area concerns me a great deal because different classes of creditors voted on that moratorium proposal. People with priority rights would clearly have voted for a moratorium because they would have voted to protect their own interests. I come back to the point that regular mum and dad investors—many thousands of them lost their life savings—in many cases did not understand the true risk that they were taking. Thank you Mr Assistant Speaker. 
AMY ADAMS (National—Selwyn) 
: 
 It is a great pleasure to take a call in the third reading debate on the Crown Retail Deposit Guarantee Scheme Bill. I have sat in this House and listened to the entire debate on this bill. It has been very interesting and there have been some very worthwhile contributions from all sides of the House. It certainly is good to see support from across the House on this bill. 
Obviously in effect we are continuing the scheme that was put in place by the previous Labour Government in October last year while Parliament was dissolved for the election period. At that time the scheme put in place was to expire in October next year but it is now very apparent that a longer-term transition is needed so now we see primary legislation before the House to put in place a new scheme. But the reality is that it is very much akin to continuing the existing position whereby retail deposits and bank and non-bank lenders can be guaranteed by the Crown. 
In the debate there has been a very wide range of contributions and some very big-picture analysis of the economy risk the banking sector what went wrong who is to blame and where we should go from here. All these things have their place but I am taking a short call to go back to the fundamental operation of the bill. Really it is about investor confidence and the stability of our sector. I think it is worth reiterating the point that my friend Mr Foss made so well in his speech when he said the bill is not about guaranteeing the banks or ensuring that they do not lose money. It is about ensuring mum and dad investors those people who have put money into the banks can have confidence that their money will be there when they come to get it. 
That confidence is important. It is important not only to look after the hard-earned money they have worked hard to save but also to ensure that liquidity stays in our system because those same deposits are then turned around and lent out to businesses and homeowners. Dr Norman talked about the difficulty for businesses in borrowing money. I am sure that is right particularly at the moment. But if we do not have deposits the banks will not lend. It is a pretty simple equation. That is why this system is so important. 
In this bill we have a system that ensures that any or all debt securities as defined in the Securities Act in an eligible entity can be guaranteed by the Crown. But—and it is an important “but”—that is only if the Minister believes it is necessary or expedient in the public interest to do so. I make that point and I made it during an earlier contribution because even if the eligibility criteria are met it is still up to the Minister’s discretion to determine whether granting any particular guarantee is in the public interest. That is the overriding test here. It is not about what the institutions want and not about whether they want to be able to put it on their website; it is about whether it is in the public interest for that particular entity to be guaranteed and for those particular debt securities to be guaranteed. 
We have a system that has a number of safeguards in place. It really makes it clear that the principle consideration in this entire system is the public interest. As I said the public interest is about protecting the funds of the mum and dad investors but also about the stability of our system. That stability has been more important in the last 12 months than ever before. If ever we have had to wonder about the stability of our banking system now we know first that we have a fairly good system compared with the rest of the world and second that that is crucial. It is crucial to New Zealand’s ability to weather the worst of the storm and to come out of it I will not say “untouched” because certainly a lot of people have been hurt terribly in this recession but in a considerably better position than we might otherwise have been. The bill is a good bill. I commend it to the House. 
Hon CLAYTON COSGROVE (Labour—Waimakariri) 
: 
 I like a previous speaker Amy Adams have spent a fair amount of time listening to the debate on the Crown Retail Deposit Guarantee Scheme Bill. It is correct to say that the Opposition is supporting the bill. The previous Labour Government brought in the initial guarantee scheme in October 2008. High priority has to be given to the security of investments and to the stability of financial institutions within an economy. That is a bedrock principle. The Opposition though in supporting the legislation has raised a number of questions. If we look at the history of the initial guarantee scheme which the previous speaker said rightly was put in place on the eve of the last election we see that the overseas funding—the wholesale area of banking—was provided with a guarantee. Without legislation or regulation the then Labour Government negotiated with the banks to ensure that those guarantees extended to the retail sector and to mum and dad Kiwis. There is always a lot of criticism over regulation and legislation. Ironically this was an instance where negotiation occurred in extremely turbulent and volatile times and on the eve of an election. The banks after discussion and agreement actively participated in that retail space and mum and dad investors had their deposits guaranteed. 
The argument that we make here is about the question of what would have happened if the banks had not agreed to participate in that retail space. Who knows? I suspect as we have said in this debate that it would have been unacceptable—and it should be unacceptable today—that banks are given a cast-iron Government guarantee without the Government requiring a reasonable price. By that I mean that banks participate in the retail end of the market. The Government has guaranteed quite properly for overseas interests and overseas financial markets that provide equity and funding to our banking institutions that if the bank goes belly up then those international funds are guaranteed. Why is that? As I have said those guarantees are necessary in times such as we live in now to ensure that the money—if you like the lifeblood—flows through the veins of the financial institutions in respect of liquidity. 
What is missing therefore is a price for that Government commitment. I disagree with Mr Gilmore when he says this scheme will not benefit the shareholders of the banks. For goodness’ sake as a man who purports to be the resident genius of this Parliament in the commercial and in every other non-academic and academic area does he not realise—[ 
Interruption 
] Suddenly the National members are awake. Does Mr Gilmore not realise that any time a Government— 
Amy Adams 
: It’s very hard to stay awake. 
Hon CLAYTON COSGROVE 
: National members chirp away when it comes to giving a wee bit of stick but they do not chirp away when it comes to guaranteeing and supporting the average mum and dad Kiwi investor. 
Amy Adams 
: That’s what this bill is doing. 
Hon CLAYTON COSGROVE 
: Oh no! Bill English as the Minister in the chair sat there silent as if he were dead. He might be dead politically after today’s headline let me put it that way. 
National members are very chirpy when it comes to having a bit of a dig but when it comes to actually supporting mum and dad investors there is a deathly silence. Any time a Government gives a guarantee to a business or financial institution that is a huge point of differentiation from any other participant in the market. If I am an investor and a bank has a cast-iron guarantee of the Crown behind it of course I will invest in it before anything else. I could not lose could I? Why would I not invest in a bank that has a Government guarantee? I would be in a no-lose situation. Mr Gilmore should whip back to Canterbury University and to the remedial class for the MBA programme in the economics department dust off the textbooks and have another go. 
The problem in this debate is that the National members have reverted to type. They have backed the big end of town but when it comes to mum and dad investors they have not required a high price from the banks which is that they participate in the retail end of the market. We managed to do that not through legislation regulation red tape or bureaucracy but through partnership and negotiation. We put it on the banks. If they had not participated in the retail end of the market we may have had to look at other more formal mechanisms. But we got their agreement to do it and as a result mum and dad Kiwi investors had their deposits guaranteed. International financial agencies—lenders to our banks—had their investment guaranteed and like our Australian cousins we averted massive volatility instability and lack of confidence in our financial sector. 
Then we come to the progression of this scheme. As I say we support the bill but we raised yesterday and we raise again today the question of why the Government would not go to the banks and even attempt to negotiate their agreement to participate in the retail end of the market. What is the cost? The Government would not even get the banks in a room as we did and say that if it was going to put the taxpayers’ money on the line to back them they had to come to the party and back their deposit holders the mum and dad Kiwi investors. The Government could not be bothered. 
I raise that issue again because no one wishes for volatility and instability that could tip over a financial entity as we have seen in the past and put mum and dad Kiwi investments at risk. Nobody would wish that; nobody wants that. I accept that that is not the intent of the Government or of this side of the House. But the problem still exists. Why does the Government give the big end of town a gilt-edged guarantee and not give the small end of town—perhaps some of the young folks who are in our schools and who deposit money every day or every week through their school account—a guarantee at the retail end of the market? I say again to Mr Gilmore that any financial entity that has a Government guarantee—[ 
Interruption 
] The voice has gone up an octave. Any agency that gets a financial guarantee has a differentiation point in the market. An investor cannot lose so will back that agency. The share price will go up as a result. That is the point. 
I also make the point to the Government members that in respect of the eligibility criteria the Minister as we know has the authority to determine eligibility. The height bar for that eligibility is centred round the BB credit rating. Again I say to Mr Gilmore who takes this view that in order—[ 
Interruption 
] The voice has gone up an octave again; I am not sure which member it is. For smaller financial organisations achieving a BB rating is not a matter of simply paying the money and filling out the form. These agencies’ own financial and professional reputations are on the line so they do not give out credit ratings just because financial organisations pay their fee. I am sure that the member being the learned expert he is—far more so than me—will give us a dissertation on the intricate aspects of gaining a high BB credit rating. But putting the detail aside we know that there is a cost. That cost can be marginalised if you will by a large financial institution but a substantial cost is visited upon a small financial institution. There are huge responsibilities which is as it should be involved in gaining that credit rating. If smaller financial institutions cannot gain that rating then the question is whether there will be flight in terms of investment. No one would wish this to occur but it is worth posing the question of whether there would be flight in terms of investment from those smaller institutions which would therefore create instability and the situation where they could fall over and where mum and dad Kiwi investors’ money would be in jeopardy. 
Members on this side of the House support the bill but we also put on record that we are concerned about the small end of town. Government members are concerned about the big end of town and that is all they are concerned about. 
PESETA SAM LOTU-IIGA (National—Maungakiekie) 
: 
 I acknowledge the earlier speakers who have contributed to this debate. A number of issues have been raised and a number of questions have been asked. I acknowledge those who have made a contribution. 
Rather than talking about the wider issues of the financial industry we are talking today about the Crown Retail Deposit Guarantee Scheme Bill. As many members stated earlier the scheme was put together last October with a degree of haste by the previous Government in its waning days. It was one of its last acts— 
Amy Adams 
: 8½ years wasn’t it of waning? 
PESETA SAM LOTU-IIGA 
: —yes—in Government. We stand to support the scheme. The scheme is about giving confidence certainty and stability to an important industry in New Zealand. 
I will touch on the views held by members opposite about the role of Australian banks in this country. From the diatribe that has come from some members across the Chamber it would seem that Australian banks are big nasty evil institutions but they are not. I put it to members that without the investment in this country from the four Australian banks our economy and our businesses would not be as well funded as they are today. We have a long way to go in terms of funding and access to capital but to paint the large Australian banks as evil institutions is I think a little bit rich coming from members across the Chamber. It is about our accessing capital in this day and age—the electronic age the Internet age—when we can access capital from around the world. 
One speaker referred to 80 percent of the flow of funds coming from Australia. Yes it would be positive if that flow of funds was diversified around the world but it is not and that is the situation we find ourselves in. Our economy is inextricably linked with the Australian economy. We heard a number of points raised about the way that we align ourselves with Australia and the way that we harmonise not just our financial industry but also a number of industries across our country with those of our Australian brothers and sisters. It is a positive to work with our Australian counterparts and a ministerial delegation went across the Ditch in the last couple of weeks. 
Another point that was raised by my colleagues across the Chamber was distortions. Yes there are distortions from this scheme being in place. There will always be distortions where there is any form of Government intervention in an industry. But to say that larger institutions gain the most benefit from this particular scheme because they have better credit ratings is to misunderstand the nature of credit ratings. The only financial institution that holds a triple A credit rating is not a US institution; it is a Dutch institution called Rabobank. Rabobank as many members will know is not the largest bank in the world. In fact it is not even the largest bank in the Netherlands where it is based. It is a bank that has a quality book and that is what determines ultimately the credit rating it receives. Size and scale have nothing to do with the nature of one’s credit rating. 
It is about jobs growth and exports and Labour members have to admit that exports have declined year on year for the last 5 years. I do not know how those members can complain about some of the moves that this Government is putting in place. It is about jobs it is about growth and it is about exports and the scheme will go a long way to alleviating some of those problems. 
Finally the bill provides a transition away from the scheme. By December 2011 the scheme will expire. It is our hope and it is certainly the hope of many across this country that the economic recession will have subsided by that time. It is our hope that this type of scheme will not be required and that the banks and the financial institutions will be able to go out into the markets raise capital and offer capital for our businesses to grow and expand. 
In brief I support the bill. I think it has much credibility in terms of bringing stability and confidence and the right amount of investment in our financial institutions. Thank you. 
Hon LIANNE DALZIEL (Labour—Christchurch East) 
: 
 I want to express some concern about the quality of the debate and I do so reluctantly having listened to the contribution from Peseta Sam Lotu-Iiga the honourable member and councillor who has just resumed his seat. The reason I am a little concerned about the quality of the debate is the way that this Crown Retail Deposit Guarantee Scheme Bill is being dealt with. It is being dealt with under urgency and I believe that bills such as this one should not be dealt with as a matter of course under urgency. There is a serious issue about legislation not having the quality of scrutiny that the public would expect in the circumstances. As my colleagues have said repeatedly the Opposition is not in opposition to the bill as a matter of principle. The underlying desire to ensure financial stability at this time is obviously a desire that we support. But Treasury officials recommended that referring the bill to a select committee for 1 to 2 days would not be a problem and they said that it would enhance what they considered to be a flaw in their consultation process because they were not able to have the degree of consultation that they would expect. 
I will say why referring the bill to a select committee for 1 or 2 days would not have made any difference. One reason is that it would not have held the bill up for a time of any great moment and we still would have had the legislation in place 1 year before the expiry of the current guarantee scheme. We could have still met the timetable that the Government has set for the implementation of this legislation so it was not an argument about the amount of time the bill would have spent before a select committee. Nobody on this side of the House suggested that it should go there for the normal 6 months. 
The advantage of sending it to a select committee is that members of the committee get to test assumptions. All of the decisions that the Government is making in this respect are based on assumptions that have been proposed by officials from both the Reserve Bank and Treasury and it would be really helpful to the Opposition for us to be able to test those assumptions to push back on some of them and to have some serious debate about these serious financial issues. 
The second reason is that we can work through the analysis that lies behind the advice. How are our assumptions formed? They are based on analysis that has been undertaken. I have some issues with some of the analysis that we have been presented with in the regulatory impact statement but I will come to those in a minute. 
The third reason why select committee processes are important even if they are truncated is that we can get answers about the balance between what the regulatory impact statement itself says was a line call between the status quo and the extension of the scheme especially when the banks do not favour the extension according to the regulatory impact statement. These are serious matters and they are reasons why with a short period of reference to a select committee we could have dealt with this bill through its remaining stages next week also under urgency and there would have been less opposition from the Opposition to the process. As I say we are generally on board with the underlying principles. 
This brings me to the regulatory impact statement. I do not recall seeing such an extensive regulatory impact statement. Of course those who know me will know that I tend to bang on about the quality of regulatory impact statements. Since we have had a Minister for Regulatory Reform the quality has actually gone down but this regulatory impact statement stands out. It is the best regulatory impact statement I have ever seen but it is not written in the bill. It is not included in the bill. All they did was put the executive summary in the bill and then publish the regulatory impact statement on the Treasury website. So of course I downloaded that over the dinner break yesterday— 
Hon Simon Power 
: Of course you did! 
Hon LIANNE DALZIEL 
: Of course I did because I like doing things like reading regulatory impact statements. 
But the thing that really upsets me is that the regulatory impact statement shows all of the reasons why we should have had a select committee process to work through all of the issues that it raises and I want to go through those. I know that the Minister in whose name this bill sits the Hon Bill English is very famous for using the phrase “The devil is in the detail.” I have found by going through the regulatory impact statement that the devil is indeed in the detail some of which has not yet been determined. I wonder whether this is in fact going to be the last bill we see from the Hon Bill English before he resigns his portfolio which I suspect will be very very soon. 
The regulatory impact statement raises the following issues: first of all on page 4 we get the reason why the decision needs to be made now. The reason the decision needs to be made now is to “Provide greater certainty to investors and enable them to make sensible reinvestment decisions.” When does the application have to be lodged by? It has to be lodged by 12 October next year so the whole idea that this has suddenly got to be done a year out does not make sense when entities get a whole year to apply. It simply does not make sense. When we look further on in the report we see something very interesting: most large entities already have credit ratings so I would say that those that want to opt in are going to opt in relatively quickly. Entities in the process of getting a credit rating will not have certainty until they have received their rating since the credit rating of BB or above is a requirement to be eligible for the extended deposit guarantee scheme. Under the new prudential requirements for non-bank deposit-taking institutions credit ratings are required by 1 March 2010 for entities with liabilities greater than $20 million dollars. 
Why not link the application to the close-off date for the non-bank deposit takers’ credit rating requirements of the new prudential supervision arrangements? I do not understand why that is the case. That is why reference to a select committee would have enabled these questions to be asked and answered. So to say that the depositors will have the assurance they need is just nonsense because we know that the assurance is in relation to the finance companies. Entities in the finance company sector do not get to do this until they have got the BB rating. The ones that are in the scheme at the moment do not all have BB ratings therefore there is a period of time of uncertainty that does not link to this urgency we are seeing here today. 
The second point that the regulatory impact statement raises is the question of economic distortion. The point is raised in paragraph 26 on page 5 of the report and I think that it really does identify the line call that the officials made when they made the recommendation to the Government: “Allowing the DGS to lapse”—which is on October 2010 obviously—“avoids the additional period of economic distortion.” We have all agreed that economic distortion happens when we have a retail deposit guarantee scheme. “Moreover the DGS ceasing in October 2010 would avoid the possibility of firms using the longer DGS period to imprudently grow their retail deposit books increasing the Crown’s exposure.” Actually that is what this is about. It is about the Crown’s exposure to the risk of failure and the view that this would all collapse around the October 2010 deadline. We do get it. 
I guess that the real motive for the change is certainly spelt out on page 8: “If the DGS ceasing in October 2010 resulted in concentration of defaults in the lead up to the end of the guarantee period then that could also lead to assets being realized over a short period depressing asset prices and reducing recovery rates and so increasing the net costs to the Crown of the default event.” That is perfectly obvious in the discussion documents but we have not had this debate in the House. We have not had the opportunity to get that exchange happening that we would have had at a select committee hearing which is my point. 
The final element contained within the report is the option beyond the status quo which is essentially to extend the deposit guarantee scheme under tighter terms. That is what the Government has been trying to say but not saying very well. It is about easing the process out of the market so that we can return to a period where the entire sector is operating in a guarantee-free environment. We do get that but I think it is really important for the House to remember that when we are dealing with issues of such substance we really ought to have officials in front of the members of a committee so that there can be that exchange. 
On that note and as many of my colleagues have said I say we are supporting the passage of the bill. Other considerations could have been taken up in the way the scheme is being developed but I would like to hope that because this is framework legislation and the detail is still to be worked out the Government will extend the cooperation we have extended both ways on a lot of finance company issues to engage with us on some of the detail about how the scheme might progress into the future. I will certainly be pleased to see the bill pass its final stage. 
AARON GILMORE (National) 
: 
 That was Lianne Dalziel the previous Minister of Commerce in the Labour Government that oversaw a large number of finance companies lose I think about a billion dollars during the time of her reign. But I think I heard more validity and understanding of the finance sector regulations in that last speech than I did in her speeches in her entire time as Minister of Commerce. Some very good points were raised by the previous Minister of Commerce in that last speech. 
I will raise a couple of issues including why this legislation is going through under urgency. It is pretty simple: the financial sector is unbelievably sensitive to information about changing a regulation. The financial sector is one where people have a good understanding of what goes on and when we look at what has occurred we see that even Treasury—in its great regulatory impact statement that Lianne Dalziel the member over there was speaking about—talked about the need for urgency for this legislation. The finance sector needs certainty and surety in relation to this legislation being passed. Even the regulatory impact statement goes into some detail about the need for urgency. The previous scheme which this scheme is replacing was implemented urgently without any select committee process. Giving a number of days for a select committee process would only drag this legislative process out and remove the certainty the finance sector needs for such legislation. 
I will touch a little on credit ratings. There have been a number of statements about credit ratings and a bit of misunderstanding about what a credit rating is: what is in what is out and how people get one. I suffered here from statements from a member on the other side of the House who criticised my understanding of credit ratings. I will say two things. The first is that on 1 March 2010 all non-bank deposit lenders with assets of over $20 million will be required to have a credit rating—all of them. That is existing law. Secondly the reality is that yes for about $100000 anybody can get a credit rating. Apart from that people do not know what credit rating they might get until they go through a process. 
Amy Adams 
: Like a box of chocolates. 
AARON GILMORE 
: Like a box of chocolates. When one goes through the process one might get A AAA B BBB or C but one does not know until one goes through the process. There are very well defined guidelines and rules about what credit ratings are given to what entities given their financial strength. That is well-known public information: to get the grade one has to go through a process that will cost about $100000. 
We also heard an outcry from the other side of the House about why we need to guarantee the banks. We believe that this regulation is needed to lubricate the wheels of industry. Lubricating the wheels of industry is very important. We heard from the Greens earlier today. Those members do not want to lubricate the wheels. They want to put a grinding halt on them and throw some sand in the wheels of industry. They want to control everything under the sun. What that says is that we would have no lending at all. I would look forward to that situation under that member’s control. I do not think many members on this side of the House would want to be in New Zealand. 
We also heard about the lack of consultation on this bill. Again the grand regulatory impact statement stated that the Reserve Bank and Treasury have had large amounts of consultation with many players in the industry: finance companies banks and everyone else in between. I think it is remiss to ignore that consultation. 
I want to talk about one more aspect and that is the issue of the fees. That is linked to the issue of the credit rating. Obviously the fee scheme we have here is risk-based. If one is riskier to the taxpayer the users will pay more. 
The final aspect that I want to touch on is the aspect around whom this guarantee covers. It does not cover the banks and it does not cover the finance companies; it covers the people who give their money to the banks and to the finance sector. I think that is a good thing. 
As the final National member to speak on this bill I think I have outlined that there are a number of good aspects to it. Hopefully it will be passed and will give confidence to the finance sector. I think that is a good thing for New Zealand. 
STUART NASH (Labour) 
: 
 I rise to support the Crown Retail Deposit Guarantee Scheme Bill in its third reading. It appears that there will be two things that will expire in October 2011—the Crown retail deposit guarantee scheme and by the look of things the National Government. Bring that on! As has been previously alluded to the Crown retail deposit guarantee scheme was urgently put into place by the Labour Government for a number of social and financial reasons. The main financial reason however was to create a level of global confidence in the New Zealand banking sector through the provision of Crown guarantees thereby allowing the level of liquidity required to allow New Zealand - domiciled banks to operate. Put more simply the scheme allowed our banks to continue to borrow money when there was a risk that they could not. That risk was not good. Australia had instigated a similar scheme just the day before I believe and if New Zealand - domiciled banks were to be able to gain access to a very tight pool of global funds the scheme was imperative. 
Members will remember at the time—a year ago—global financial institutions and household names like Lehman Brothers Bear Stearns Bank of America Fannie Mae and Freddie Mac had either failed or were in the process of failing. They were huge institutions with enough leverage to cause the type of credit crunch that the world was beginning to experience. At this point we were not sure what depositors in New Zealand would do. Would they do what they had previously done to the finance companies—namely start a run on deposits caused by a crisis of confidence leading to a sector-wide collapse and near extinction? The scheme came into effect on 13 October 2008 and was to last for 2 years. Hence the reason we are in this House today debating the passage of this bill. 
As I mentioned and many of the Labour speakers have mentioned it I have some concerns over the urgency nature of this bill because I believe it favours the rule of money over the right of the people to have their say through the select committee process which is a fundamental principle of our democracy. Of course the dire and urgent circumstances under which the first Crown retail deposit guarantee scheme was implemented are markedly different from the state of the current global financial sector today. The reason the original scheme did not have its own legislation is simply that the House had been dissolved in the countdown to the general election and therefore technically there was no ability to take this through the legislative route but most important in October 2008 the world’s financial system was in meltdown and decisive action was required. That is why it was done in 24 hours and implementation was immediate. 
The times have changed. If nothing else we now know the state of the global economic situation and this knowledge has allowed Governments around the world to put in place packages that have alleviated the worst of the effects of the global meltdown. That knowledge has allowed prudent banks including those operating in the New Zealand market to rethink their fundamental philosophies around the pricing of risk and the management of growth. That has allowed them to develop strategies that are in line with the state of the market as we now know it. Actually we are now at the point where the large banks are currently analysing the cost versus the benefit of their participation in the retail deposit guarantee scheme. There is a price for participation. For example a bank with $20 billion in retail deposits would pay around $15 million in fees per annum. That is more than the Government has cut from adult and community education in the Budget which means that for example in Napier no high school will be running night classes in 2010. So the 6000 students who took those classes in Hawke’s Bay will not have the opportunity to upskill socialise or improve themselves personally or professionally. Our people in our communities are the worse for it. But that is another story. 
The reason that I bring up the change in circumstances is that this bill need not have been forced through under urgency. It could have had a very tight reporting-back time. As a member of the Finance and Expenditure Committee assuming that the bill had come to that committee I would have been most interested in hearing submissions from all affected parties especially submissions for the major banks—except that the major banks are averse to presenting submissions. That is the irony of this bill. The major Australian banks have done very well out of this scheme as have the New Zealand economy and New Zealand depositors. Do not get me wrong; I understand the value to the New Zealand economy of the big Australian banks. But the irony of this bill is that the banks have taken advantage of the scheme but they have refused to appear before a banking inquiry to alleviate the fears and dispel the rumours about the current state of the banking industry and the way they are treating ordinary Kiwis in terms of the amount they are charging on short-term floating mortgage rates. I spoke to one of the bigwigs of one of these large banks and asked him why he did not just come along to the inquiry just to show and prove to Kiwis that in fact the banks are not ripping off ordinary New Zealanders to dispel that rumour and dispel that perception. He said: “Cobber you are probably right.” but it did not change the bank’s stance. 
Anyway as I was saying the true urgency has actually now disappeared from this scheme. It has another 13 months to run in its current form and therefore there is enough time to follow the proper course for passing legislation. The Minister of Finance told us yesterday that he made a call due to the need for certainty. I accept the fact that financial markets operate optimally in an environment of certainty but I would contend that we could still have afforded certainty 13 months out. I also ask if this bill was important enough to rush through under urgency why it was not on the Order Paper 6 months ago when we were debating the secondhand-car dealer bill or other legislation that although important perhaps did not have the same national interest as this Crown retail deposit guarantee scheme does. After all this bill will protect over $120 billion in deposits currently held by the banking and non-banking sector. Did Gerry forget to put it on the Order Paper? 
That Minister of Finance coincidentally was also the Minister of Finance during the last crisis of the 20th century. Most economic commentators and historians have concluded that he handled that crisis pretty badly. Coincidentally he is still trying to implement 20th century stimulus packages when the rest of the world has left Friedman behind and started limiting economic measures to those targeted at people who need them—those on low and middle incomes—instead of a third of all tax cuts going to the top 3 percent of wage and salary earners. Do members know that if a person earns under $40000 that person receives nothing from the Government tax cuts? In Hawke’s Bay that is around 75 percent of the population who receive not a penny in tax cuts from Mr English and the National Government. Anyway I digress. 
Hon Dr Nick Smith 
: How much did Labour give in 9 years? They put their tax up for 9 years. 
STUART NASH 
: That is very interesting because I would say that the Labour Government was in fact the only Government in two generations that cut the corporate tax rate. And do you know what? Nick Smith voted against it. Nick Smith voted against a cut to the corporate tax rate. Goodness me! Anyway I digress. 
Along with all my colleagues I support the substance intention and philosophy of this bill but I reiterate my grave concern about the lack of any sort of transparent consultation with the wider community. In my view meetings with Treasury and the Reserve Bank do not constitute wide consultation with the affected participants that make up the bank sector and non-bank sector in all its many and varied permutations. Thank you Mr Deputy Speaker. 
Bill read a third time.