KEY POINTS:
The Government is charging plenty for the insurance service it is offering banks with respect to their wholesale funding.
That is as it should be. The nature of such guarantees is to transfer risk from the shareholders of the banks, which are mainly Australian-owned, to the New Zealand taxpayer. You don't want that arrangement to last any longer than absolutely necessary.
It is galling that the international environment is such that we have to resort to making such a facility available to banks which by international standards have clean balance sheets and high credit ratings.
But our collective eagerness to borrow and reluctance to save means the banks import on average more than a third of their funding - some $120 billion right now - and in a world where credit is scarce that is a dismal position to be in.
Unlike the scheme for retail deposits, it is not a blanket guarantee. Banks will have to decide whether to use the guarantee case by case.
The designers of the scheme have had to strike a balance in several difficult areas.
They have to price the guarantee high enough to encourage the banks not to use it if, or as soon as, they don't need to, but not so high as to be prohibitive and defeat the purpose of having such a scheme.
They have to avoid subverting the relationship between risk and reward, which they have attempted to do with a sliding scale of fees related to banks' credits ratings.
They would want to encourage the banks to draw on their Australian parents for funding. Ownership should have its responsibilities as well as its rewards.
The extent to which they can do that is limited by Australian Prudential Regulation Authority rules. But by setting fees at a higher level than the Australians have, the scheme attempts to incentivise maximum use of that source of funding. Fees are higher for longer periods than for short ones but that has to be balanced against the undesirability of banks borrowing short and lending long - at least any more than they normally do.
The Government says the scheme's fee structure makes it more expensive than the US and Australian schemes, but cheaper than the Canadian one and roughly in line with Britain's.
Crucially, it allows for the fee structures to be reviewed monthly and adjusted (though not, of course retrospectively).
On the the face of it the designers have done their best to minimise the inevitable difficulties - boundary issues, moral hazard and the need for an exit strategy.
But there is no getting away from the fact that to the extent the facility is used, it heaps risk onto taxpayers and cost onto borrowers.
