Taxpayers are unlikely to have to pay for a big bank bailout under the Government's deposit guarantee scheme, but they could get the bill for finance company failures, says Reserve Bank Governor Alan Bollard.
Under the scheme, announced on Sunday, the Government guarantees bank deposits up to a total of $150 billion, which Dr Bollard yesterday said was probably the Government's single largest contingent liability.
"The likely real liability would be far, far less," he said yesterday.
"One can see only in the extreme case the odd finance company or something down the bottom of the non-bank financial institution structure being into any sort of call on this."
Deposit-taking finance companies are covered in the Government's scheme.
Dr Bollard said the hastily drafted scheme was far from perfect.
Concerns about it included the resulting "moral hazard" - the possibility that with a Government guarantee on deposits, banks and other institutions may indulge in riskier activities.
Dr Bollard said there were also "boundary issues" over deciding what qualified as a deposit for the purposes of the scheme.
At least some of the big banks are unhappy that the guarantee does not extend to wholesale deposits, unlike the Australian scheme also announced on Sunday.
They were also unhappy that they will pay tens of millions in fees under the scheme while smaller, riskier institutions will pay nothing.
Dr Bollard said some distortions were inevitable in such a "big-umbrella scheme".
"The only thing we would have concerns about is whether finance companies that are lending quite riskily might try to get cross-subsidised off the Government guarantee."
Massey University's head of banking studies, David Tripe, agreed this was one of the "unfortunate consequences" the scheme might throw up.
"If you were running a small finance company, you would now have a wonderful opportunity to rake money in and lend it out on all sorts of risky projects."
Dr Bollard said the Reserve Bank might have to "spend more time focused on finance companies' behaviour" and checking that they were complying with their trust deeds.
Some finance companies in breach of their trust deeds, including Hanover Finance and Dorchester Pacific Finance, have indicated they may seek to become compliant with those deeds once again so their deposits can be covered by the scheme.
The introduction of the scheme will be a bitter pill for investors who have already lost or stand to lose money in the string of finance company failures over the past 2 years.
Suzanne Edmonds, of the investor activist group Exposing Unacceptable Financial Advice, said she had received hundreds of phone calls from group members and other finance-company investors asking "how can the Government do this for the banks when it didn't do it for the finance companies?"
Auckland University of Technology economics lecturer Suzanne Schroeder said the scheme would make deposits more secure by boosting depositor confidence.
But it was a pity that people who had already lost money in finance company crashes were not covered by it.
"Perhaps as the details are hashed out, there might be a change of heart so they could get something back."
* The Government will guarantee deposits in institutions including registered banks, building societies, credit unions, deposit-taking finance companies and in cash PIEs (portfolio investment entities) sponsored by qualifying institutions.
* The Government will cover an institution with up to $5 billion in deposits for free. Larger institutions will be charged a fee of 0.1 per cent of the value of deposits above that.
* The scheme will run for two years.
* It will add about $150 billion to the Government's books as a contingent liability.