Banks: We will help struggling borrowers

Treasury Secretary John Whitehead and Reserve Bank Governor Alan Bollard said the primary goal of the banking guarantee was to help banks re-enter regular foreign markets to raise cash, though it could also apply to debt raised in New Zealand

There had been fears that New Zealand banks would have cash dry up as overseas investors stayed clear of any bank that did not have a Government guarantee.

The guarantee will be available to financial institutions with an investment grade credit rating and with substantial New Zealand borrowing and lending operations.

It will operate on an opt-in basis.

Dr Cullen said the guarantee's variable fee was designed to encourage the banks to apply for the guarantee where it was needed, and to use it only for as long as necessary.

The guarantee would apply to individual transactions, which would have to be approved by Government officials.

This would mean that, because of the extra cost in paying the guarantee fee, banks would want to apply for the guarantee only when it was necessary to ease fears of overseas lenders.

In other countries, governments have sought equity in the banks they guarantee, but Dr Cullen said this was not necessary in New Zealand.

In those cases, the banks had needed to be recapitalised, and no one in the private sector was willing to do it.

New Zealand's banks were fundamentally sound, he said.

Problems had been caused by the international credit crunch drying up funds.

Without that cash, banks could not lend and the economy could grind to a halt.

Dr Cullen said the scheme was a "necessary evil".

It was difficult to estimate how extensively the banks would use the guarantee and how much the Government would male in as fees, but Dr Cullen thought it could be around $1 billion.

It would be important not to spend that money, he said, as the Government might need it to cover the guarantee.

* The scheme

The wholesale funding guarantee facility, announced by Finance Minister Michael Cullen, is for investment-grade financial institutions in New Zealand.

The Government has already offered a guarantee for retail deposits to stop worried customers pulling money out.

The wholesale scheme is designed to apply to individual securities issues.

It includes fees that become more expensive for banks with low credit ratings and the longer the guarantee is intended to apply.

The total liability could be up to $450 billion, if banks chose to cover all their funding.

- ADDITIONAL REPORTING: NZPA