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:6054] 
Hon DAVID PARKER (Labour) 
: 
 I endorse many of the comments made by the previous speaker. I would though like to explore one of the reasons why we need to eventually wean ourselves off guarantees such as these. They do create distortions within the finance markets. 
There is a notable exception to the guarantees that have been offered here in the Crown Retail Deposit Guarantee Scheme Bill and that relates to collective investment vehicles. Sometimes there are subtle distinctions only between collective investment vehicles and traditional savings institutions. For example some of the group investment funds that have been traditionally run by trustee companies and some of the unit trusts that have been mortgage-backed whereby the money has been invested by ma and pa ordinary New Zealanders in a unit trust through a unit trust or a group investment vehicle have been invested in first mortgages over land. These are not any riskier than finance company investments. Indeed they are less risky because the owners of the funds who are investing them in unit trusts and group investment funds effectively have a trust interest in first mortgages over land. 
So those funds are effectively investing in something that is secured by a first mortgage yet because of the terms of this guarantee scheme—and I am not criticising it for this; I am just making an observation about the distortion it creates—and the structure of that investment they are not eligible for the guarantee. As a consequence we have seen some pressure on those sorts of funds. There has been a run on those funds caused by withdrawals from those schemes which are safer than most finance company investments but for the guarantee. So the presence of a Crown guarantee has made a finance company investment safer than an investment that has been backed by a first mortgage. That is the sort of distortion that can be caused by guarantees of this nature. 
Unfortunately when there is a need for these sorts of guarantees there is no way of avoiding all of the distortions at the margin other than by increasing the scope of the scheme in a way that would involve some investments that ought not to be guaranteed. For example if someone was investing in a share portfolio I do not think that New Zealanders would think that the Crown should guarantee returns on that sort of investment and that is another collective investment that one might make through a superannuation scheme or indeed a unit trust or a group investment fund. So the point I am making is that guarantee schemes such as this one introduce complexity at the margin. That is impossible to avoid if we are to have a scheme but it none the less points out that it may well be desirable to bring the scheme to an end eventually. 
I also make the point that in future I think we need to be very careful about focusing only on credit ratings. Credit ratings or high credit-ratings are the key to the fee that is paid by an institution that is getting a guarantee. A finance company with a low credit-rating has to pay a higher fee for a guarantee. That of course is as it should be. For a bank with a good credit-rating the fee that it has to pay for the guarantee is less than it would otherwise be because the risk that the Crown is taking is less. But if we look behind that at other New Zealand - owned institutions like some building societies and credit unions we see that some of these organisations are quite small because we have a small economy and that they will never have a high credit-rating. If we persist with this sort of charging mechanism we are saying effectively that we prefer the interests of overseas-owned banks against the interests of smaller New Zealand - owned institutions. I suggest that that is true because no New Zealand - owned institution can get the high credit-rating that entitles it to the lower fee structure. I think that is another distortion that this guarantee scheme throws up. I for one am very cautious about saying we should have these sorts of schemes long term because I think they introduce distortions between participants in the finance market. 
The last speaker Amy Adams also made reference to the fact that we need to have more than just the banking sector; we need to have sources of secondary finance. Again I agree with that. It is absolutely imperative that an economy such as New Zealand’s is not reliant on just top-tier banks. It is good that we have a stable banking system but the New Zealand system should be no more reliant on only 4 or 5 banks than would be wanted for any other jurisdiction overseas. New Zealand’s reliance on the big four banks is already extreme in my view and I would not want to have a guarantee scheme that further entrenches the advantages that the banks have at the effective market-share cost of New Zealand - owned financial institutions. Again it is an area where we need to take care. I do support the scheme but a member David Bennett from the National Government is shaking his head ignoring the reality that one of New Zealand’s problems is the size of the foreign-owned New Zealand banks’ repatriation of profits and the interest that they pay on their overseas loan books to overseas jurisdictions. 
David Bennett 
: You have no idea mate! No idea. 
Hon DAVID PARKER 
: No idea—well actually I do; I come from this industry. So problems arise from preferring the big end of town. 
One of the areas that I think my colleague the Hon David Cunliffe has already mentioned is that until now the guarantee or the ability to pick up the retail guarantee which is the guarantee that small New Zealand investors get when they invest with a bank was linked with the wholesale bank guarantee scheme which is separate from the scheme that is being discussed in this bill. The wholesale guarantee scheme relates to the big loans that banks get from their overseas lenders. So if an international bank or international fund of some kind—it might be a sovereign fund—was lending money to say the Bank of New Zealand or any other bank then the Bank of New Zealand or the other bank would have been reliant on a guarantee of those wholesale funds. The previous Government made it clear that if banks wanted to pick up the advantage of the wholesale guarantee they needed to take up the guarantee in respect of ma and pa investors and their New Zealand investments through the retail deposits scheme. 
Why is that important? Well if we do not do that what could happen if in the worst case a bank fails—and the only time the guarantee would become relevant is if a bank fails in the case of a bank guarantee—is that the overseas lender to the New Zealand banks would be effectively guaranteed by the taxpayer and that overseas shareholder would be paid out but the New Zealand - based retail investor would not necessarily be guaranteed because there is no requirement now for New Zealand banks to take the retail guarantee if they take the wholesale guarantee. I would encourage the Government to look at that area again because I think we should have consistency there. 
Having said that I do not see any effective choice but for us to continue with the guarantee scheme at this time. I do point out the distortionary effects of it and I do point out my concerns that as designed the scheme is to the effective benefit of the big end of town—the big banks. It is more costly for the smaller New Zealand institutions and I think that should be addressed. It could be addressed through the fees structure. Let us take for example building societies. Building societies are generally very stable institutions; their loan portfolios are generally of first mortgages over land. They might not have the triple A rating that a bank has but none the less their loan portfolios are probably more secure than some banks’ loan portfolios. To illustrate that I say that if a building society falls over and becomes insolvent it effectively has loans secured over land generally first mortgages over land in respect of all of its advances. So the most that could be lost would be a proportion of the amount that the building society has borrowed from investors and then lent out to mortgagors. However a bank could fail because it has lent to high multiples. Banks sometimes lend to twelve times their equity so they could have a percentage decrease in the value of their loan portfolio that means that depositors lose all of their money rather than a fraction of it. I mention those complexities but I am happy to support this bill.