We fully expect the Crown’s Retail Deposit Guarantee Scheme (“DGS”) to be terminated at the end of its final term on 31st December 2011. Our recommendation is for the government to adopt an Explicit Deposit Guarantee Scheme (“EDGS”) as the permanent feature in the country’s financial safety net. The merits for the EDGS is compelling as presented in our arguments and analysis. Despite, it’s inherent shortfall in eliminating moral hazard problems, we have viewed the EDGS as the “least harm” approach in dealing with future financial crisis and among the alternatives. Most importantly, the EDGS serves an immediate purpose of: 1) protects small and unsophisticated depositors, 2) provide effective funding ability to a relatively small but vibrant group in the NBFI sector and the funding to act as liquidity buffers in times of stress, and 3) improved stability and resilient in dealing with financial shocks.
It’s imperative that the EDGS is well designed and suited to NZ’s financial environment in order to be effective and relevant. A poorly designed one may cause rise in moral hazard and other unintended problems that becomes a cost burden and hard to manage. In this regard, we have laid out in tabulated form the design framework, highlighting the gaps between current DGS and our proposed EDGS and suggested design options. It’s crucial that the design options be subjected to more detail independent study and benefit-cost computation to arrive at an appropriate option for each component of the design framework. We propose for the government to undertake these design studies and developed the required policy tools ahead of the termination of the DGS in 2011.
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