PM sees faults in guarantee scheme

Prime Minister John Key. Photo / Dean Purcell

South Canterbury Finance should have paid more to belong to the Government's deposit guarantee scheme, Prime Minister John Key says.

Speaking after a Cabinet meeting which discussed the taxpayer cost of the failed finance company yesterday, Key scaled down the estimate but was critical of the guarantee scheme itself.

Initially the Government put the net cost - once the assets are sold off - at $600 million but yesterday the PM said once fees had been collected from the wholesale deposit guarantee scheme it would be more like $300 million to $400 million.

The Government is still expecting to collect $200 million to $250 million in fees for the wholesale deposit guarantee scheme.

Firms with deposits over $5 billion, like the banks, paid the most to belong to the scheme and were charged 10 basis points per annum on deposits above $5 billion. Those with under $5 billion were charged fees based on the cumulative growth in their deposit book and their credit rating.

Key said the scheme should have charged smaller companies more.

"The one thing that was just plain downright dumb was the way the scheme was established, in that they didn't charge fees to the small players, [such as] finance companies, but they did for the commercial banks.

"We changed that when we extended the scheme, but the crazy thing was that the South Canterburys of the world went into the scheme and didn't pay virtually anything for it."

He said without the guarantee schemes, confidence in the banking and financial systems would have collapsed and funds would have fled for the safety of the deposit guarantee schemes overseas.

"Given the acute risks our financial and banking system faced at the height of the global financial crisis in late 2008, the Government is satisfied it has done the right thing.

"Not having a guarantee could well have lead to a collapse in confidence in the New Zealand banking and financial system.

"If that had happened, the bill for taxpayers without doubt would have been significantly higher."