John Key MP

National Party Leader

19 October 2008

Statement on New Zealand Banking System

Notes to media conference (National Party Caucus Room)

Ladies and gentlemen, I have called this media briefing to make a statement regarding the developing situation affecting our banking and finance markets.

As you know, my Finance spokesman Bill English and I are now receiving briefings from the Reserve Bank and the Treasury. I have also had a number of conversations with senior people in New Zealand banks and others in the finance sector.

I have been careful to ensure there is nothing in what I intend to say to you today that breaches the confidentiality of their briefings.

I am not making this statement today because I see an imminent crisis in the New Zealand banking sector.

On the contrary, I remain convinced that, with the appropriate policy responses, our banking system can navigate the challenges that lie ahead in reasonable shape.

However, it is my view that the sooner we are able to resolve the current issues around the deposit guarantee scheme, the sooner we will give certainty to those involved in the banking sector, those who depend on our banks, and others, such as the Australian authorities who, because of the structure of our market, have a close interest in these developments.

At a time when confidence will play an important role in our economy, more certainty sooner, should be our goal.

I am, therefore, making this statement because I want to confirm to Helen Clark and her colleagues that the National Party is prepared to work with them to ensure that decisions can be made during this election period, when it would be too easy for politics to get in the way.

I also want to convey the importance of our government taking a proactive approach to settling the complex matters that are yet to be resolved.

Mr English has been in contact with Dr Cullen today to advise him that I would be making this statement.

In two weeks and six days, New Zealanders will cast their votes in a general election.

It is possible that the completion of the election formalities and the process of forming a new government could take us six weeks or even further into the future from now.

Meanwhile, it is becoming clear that some further decisions will be required regarding the deposit guarantee scheme, and it is important for the New Zealand economy that those decisions be taken as soon as practically possible and that they be politically durable.

There is a Cabinet meeting tomorrow at which I hope the Government will be discussing this matter. We also understand that some announcements regarding the detail of the Australian bank deposit scheme will be made early this week, and that will provide a clearer backdrop for decisions to be made in New Zealand.

The Government last week announced there would be a bank deposit guarantee scheme. We supported that initiative.

That scheme guarantees the deposits of ordinary 'mum and dad' investors who have some money put aside in a bank or building society, for example, and it also guarantees corporate deposits. Our banks rely on these sorts of deposits in order to lend to New Zealand businesses and to New Zealand households, and by doing so to keep our economy moving.

However, retail deposits are only part of the story.

Our banks also critically rely on wholesale funding from other banks and financial institutions. Some of this funding comes from within New Zealand, some from parent banks in Australia, and some from foreign, non-Australian banks and financial institutions.

The Government's initial announcement last week stated that these wholesale deposits - effectively, banks lending to other banks - would not be guaranteed by the Government.

Australian Prime Minister Kevin Rudd has outlined a scheme for that country which does guarantee wholesale deposits, and some deposit guarantee schemes being implemented in a number of other countries also do the same.

Our banks are fundamentally strong, but in the current international environment, without a government guarantee it will be very difficult for them to raise funds in offshore finance markets, where they will have to compete against banks with cast-iron government backing.

In this time of uncertainty, wholesale funds will flow to safe havens.

This applies to wholesale funds within New Zealand as well. There is a risk that local financial institutions will decide to shift some wholesale deposits out of New Zealand banks and place them in Australian banks where their deposits will be guaranteed.

All this means that the banks would, over time, have less money to lend to New Zealand businesses and New Zealand households, and that lending would become more expensive.

We understand from the Reserve Bank's public statements that it considers the New Zealand banks to have some weeks or months of funding in the pipeline.

However, the Government will, before too long, need to give banks, and other financial institutions, a clear indication of what is happening, to allow them to plan for any managed easing-off in lending.

The important issue here is that the New Zealand deposit guarantee scheme, as announced last Sunday, is out of line with the Australian scheme announced by Kevin Rudd.

However, there are important considerations to take into account when deciding whether or not to expand the New Zealand scheme to make it broadly in line with Australia.

Already the effect of the deposit guarantee scheme announced by the New Zealand Government involves accepting contingent liabilities in the region of $150 billion. Expanding this guarantee scheme to include wholesale deposits would involve taking on a much greater contingent liability.

Moreover, this issue is complicated by the fact that our big four trading banks are subsidiaries of Australian banks.

If the New Zealand Government were to guarantee wholesale as well as retail deposits this would further transfer risk from Australian shareholders - who actually own the big four banks - to New Zealand taxpayers, who are giving them a guarantee.

For its part, the Australian Government will no doubt be concerned about the effect of its own guarantees, and other possible changes, on the banking system in New Zealand, and on the balance of risk being held between the two countries.

That seems to me to require some fairly direct understandings to be reached with the Australian Government and with the banking regulators in that country. I believe it is important that in any such discussion with the Australian Government both major parties must be supportive of the New Zealand position, given the imminent election here.

However, we need to be clear that the overall priority for New Zealand is the continued health of the New Zealand banking system.

I therefore today repeat my offer to Helen Clark that the National Party will support any sensible measures to protect New Zealand's banking and financial system against the impact of the current international credit problems.

To the extent that these measures require further Crown guarantees, we are prepared to support them in a bi-partisan way.

To the extent that taking such measures would require agreements or actions to ensure that the banks bear their appropriate share of the burden moving forward, I offer our constructive engagement, with the intention of bi-partisan support.

If, for the reasons I have spelt out today, the Government accepts the need to find some form of agreement with the Australian Government about the framework for moving forward, then my colleagues and I will actively support that process.

I will ensure the personal involvement of myself or my colleagues in any discussions the Government wishes to have with the Australian Government in order to provide reassurance about the durability of any understandings that are reached.

ENDS

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