'Significant risk' in retail deposit scheme

Photo / Martin Sykes

Treasury did not work hard enough to protect taxpayers from risks inherent in the Retail Deposit Guarantee and did nothing as some finance companies increased their borrowings by almost 1000 per cent under the scheme, the Auditor General has found.

Auditor General Lyn Provost this afternoon published her report on Treasury's performance in implementing and managing the Crown Retail Deposit Guarantee Scheme.

While the scheme, put in place in late 2008 during the depths of the Global Financial Crisis, had fulfilled its aim of maintaining confidence in the financial system, the costs had been considerable, Ms Provost noted.

Nine finance companies covered by the scheme had failed including Alan Hubbard's South Canterbury Finance and the Crown had paid out about $2 billion - about $1.8 billion of that going to South Canterbury investors. The Government currently expects to recover about $900 million.

Ms Provost said the speed at which the scheme was set up meant that good governance arrangements and planning work were neglected.

However she also noted the decision to include finance companies in the scheme meant it carried "significant risk".

"Once deposits with these companies were guaranteed, depositors could safely move investments to where they would get the highest return, irrespective of the risk of company failure. The finance companies also had less reason to minimise risk in their investment activity. The Crown was carrying much of this risk."

She noted that during 2009, "Treasury watched some of that behaviour eventuate".

"Deposits with finance companies under the scheme grew, in some instances significantly. We saw one example where a finance company's deposits grew from $800,000 to $8.3 million after its deposits were guaranteed. At South Canterbury Finance Limited, the deposits grew by 25 per cent after the guarantee was put in place."

While Treasury was closely monitoring these changes it was doing to largely to prepare for potential payouts.

"It did not see itself as able to interact with a finance company to attempt to moderate that behaviour, even when it could see the Crown's potential liability increasing markedly."

Treasury's view appeared to be that it was better to recover what funds it could after an institution failed, than try to influence events before a failure, Ms Provost said.

"In my view, this approach relied too heavily on the presumption of minimal intervention and gave insufficient weight to the need to manage the overall potential cost to the Crown. The presumption of minimal intervention had already been weakened when the Crown introduced the Scheme."

Although the Scheme's primary objective was to secure depositor and public confidence, and it was accepted that this would involve a significant cost, "financial prudence should still have been a significant consideration".

"There was still some capacity to manage risk within the Government's policy settings."

But Treasury Secretary Gabriel Makhlouf disagreed "with the assertion that more intervention in finance companies may have reduced the fiscal risks that were an inevitable consequence of the scheme".

"The guarantee scheme was already a very significant, but necessary, intervention in New Zealand's financial system", he said in a statement.

"The Treasury considered a range of further interventions but couldn't find a case where intervention was more likely to create a better outcome. All interventions carry a degree of risk and we don't believe that the Auditor General's report gives sufficient weight to the risks that further interventions would have created."