Parker David: Crown Retail Deposit Guarantee Scheme Bill — First Reading Second Reading In Committee 
Parker David: Crown Retail Deposit Guarantee Scheme Bill — First Reading Second Reading In Committee 
[Volume:657;Page:6085] 
Hon DAVID PARKER (Labour) 
: 
 I note that the Minister in the chair the Hon Bill English has yet to respond to any of the questions that have been raised by the Opposition in respect of a bill that is not going to a select committee and that the Government sees as a very important bill yet we already have closure motions being put forward by National members. I suggest Mr Chairperson that you should not listen to those closure motions for a while yet. 
I have a question to ask the Minister in the chair about how he plans to get New Zealand out of these guarantees. Although the regulatory impact statement makes the point that this is necessary and that it seeks to minimise distortions in credit markets there is no doubt that it is distortionary and there is no doubt that it inhibits the operation of parts of the market. There is no doubt that it advantages some institutions relative to others and there is no doubt that it creates a distortion in that finance companies that are higher risk than banks are none the less guaranteed. Although the payment that they have to make for the guarantee facility might to some extent vary to take account of that I suspect that we have seen a flattening of rates in New Zealand as a consequence of the ability of some finance companies to avail themselves of the Crown guarantee. I think it is important that we see a way forward when there is a plan for either a permanent guarantee scheme which would be very difficult in my view or we have to transition away from any guarantee scheme. 
I say to the Minister that we currently have a scheme that applies only to debt securities. Debt securities have a legislative definition that is to a certain extent like all definitions a little bit arbitrary. The arbitrariness can be illustrated from the difference between something that is nominally a debt security and something that is nominally a collective investment. As I have mentioned previously investors in mortgage-based contributory mortgages or mortgage-based group investment funds or unit trusts cannot avail themselves of this guarantee scheme. That has led effectively to a rush on what are very secure forms of lending. They are mortgage-backed securities and they are far less risky than finance company investments on the whole. Yet because of the way in which there has to be a boundary around a guarantee scheme such as this one which is found in Part 1 in the definition and is limited to debt securities and which does not refer to participatory securities and collective investment schemes effectively through this definition we are limiting the guarantee to finance companies banks and building societies but investments of money that are giving people a trust interest in a first mortgage are not covered by the guarantee scheme. As a consequence that important part of the market—less important in New Zealand than it is in Australia but none the less an important part even in New Zealand—is shrinking. Who is that to the relative advantage of? It is to the relative disadvantage of New Zealand because of the ownership structure of our major financial institutions. It is mainly to the advantage of the banking sector. We know that our banking sector is predominantly overseas owned. Therefore we see further concentration of profits into the non - New Zealand - owned part of the banking sector to the disadvantage of New Zealand - owned parts of the sector. I ask the Minister to take a call to give some understanding to the Committee as to how when we come to the end of the extended period of the scheme he sees New Zealand transitioning away from the scheme. 
I will also talk a little bit about the proposed fee structure. It is relevant to Part 1 because the fee structure arises under the guarantee scheme and the guarantee funding facility. The terms of those facilities include fees that are charged to the recipient of the guarantee. My second question for the Minister relates to the breakdown of fees. I acknowledge that the Minister has a very difficult task and that he wants to see that the guarantee properly takes into account the relative risk of different investments. It is appropriate that riskier investments pay a higher fee for the guarantee because it is more likely that the guarantee will be called upon. For that reason I can see why finance companies should have a higher fee charged than a stable bank but unfortunately the metric that is chosen for the investment of fees is Standard and Poor’s - type ratings. The higher ratings are available only to very large institutions. We know that the only very large institutions in New Zealand are overseas banks. All of the smaller institutions that cannot get that high AA rating by virtue of their size including some very secure building societies smaller institutions like some of our smaller building societies and some of our better finance companies will never get a very high rating. As a consequence they will always be paying a higher guarantee fee. 
I ask the Minister to justify how that situation is in New Zealand’s interest. Although we have to have regard to relative risk Standard and Poor’s ratings—which internationally have been found wanting in the last year or two at least in some of the markets that have been rated by the agencies—are a too simplistic way to look at it. We do not want to have a system that further entrenches the existing advantages of the major banks to the detriment of the New Zealand economy because we know that for those major banks all of their profits are repatriated overseas except to the extent that they reinvest in expansion in their New Zealand business. There are a lot of profits which are a large contributor to our current account deficit and we do not want to see that contribution to our current account deficit grow. It concerns me that the way in which this fee structure is proposed will further entrench the advantages of banks and disadvantage the smaller New Zealand institutions including our smaller banks like SBS and also the Taranaki savings bank. I would like to think that the fee structure could reflect the fact that although under Standard and Poor’s rating terms those entities are not seen to be as stable in practice I think they are no more at risk than the larger banking institutions. Indeed those larger banking institutions may well lend to higher multiples of equity than some of the smaller banks. I hope the Minister takes a call to respond to those two points.