Wednesday, October 15, 2008

Deposit Insurance to be Tightened Up for Finance Companies

In a sloppy exercise in policy formation, the Reserve Bank and the Treasury have belatedly moved to tighten up the deposit insurance regulations that will apply to finance companies following trading bank representations.

Finance companies that are rated BB or below or are unrated will now have to pay a fee set at 300 basis points each year on cumulative deposits to receive a deposit guarantee.

Non banks will also face tighter regulatory requirements, reporting standards, and be subject to government inspection.

Non-resident depositor accounts will be covered by the deposit guarantee but they will be capped at the 12 October account level plus 10 percent per year (for the two year guarantee period) to allow for interest and deposit variations. Foreign depositors note: there is, therefore, a limit to the guarantee on your deposits! Reserve Bank revised regulations press release here.

No doubt this limit on the guarantee on non-resident deposits will have a chilling effect on foreign deposit inflows into New Zealand. This is hardly a reassuring signal at a time when credit availability is tight in NZ financial markets and offshore funds are necessary to continue financing credit lines in New Zealand.

The Green Party has criticised the failure of the monetary authorities to regulate lending by finanicial institutions and the institutions themselves for profligate lending (Green Party statement here). The Greens have also demanded that deposit guarantee regulations be accompanied by reciprocal guarantees of responsible lending practices and social responsibility by financial institutions.

As argued in a previous post, a privilege granted by a government - a deposit guarantee - should be accompanied by a duty - including a risk-based fee - on the part of the financial institutions to comply with tightened regulations on lending activity and balance sheet management, something that was largely missing from the first draft of the deposit guarantee policy released to the public.

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