Parker David: Crown Retail Deposit Guarantee Scheme Bill — In Committee Third Reading 
Parker David: Crown Retail Deposit Guarantee Scheme Bill — In Committee Third Reading 
[Volume:657;Page:6106] 
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.