Annex 1 – New Zealand’s Retail Deposit Guarantee Scheme 2008 (“DGS”)

The DGS work as an insurance for claims on deposits extended by the government to retail depositors of banks and other financial institutions groups, such as Non-Bank Financial Institutions (“NBFI”) deposit-takers and others that provide financial services companies that takes deposits. The DGS is administered by the Treasury and the purpose is to provide these retail depositors the confidence to continue to maintain their deposits in the above institutions. The DGS acts in times of stress and disruption to the financial markets to insure depositors and their deposits to remain in the system. Without the guarantee, depositors will rush to withdrawal their monies all at the same time form the system and as result will cause widespread liquidity risk and other contagion effects to the financial system. The DGS was initially set-up as a two year scheme that provided a guarantee cap of up to NZD1.0 million to each depositor per covered institution. In turn, institutions participating in the scheme pays a fee or a premium to the government to insure these deposits.

The above table shows the size and breadth of participants and the government’s exposure to the DGS is at NZD128 billion, according to The Treasury 2009 Regulatory Impact Statement (“RIS”). The RIS also reports a fee collection of NZD87.4 million todate, of which NZD5.5 million are collected from the Non Bank Financial Institutions (“NBFI”) Deposit Takers.

Two claims has been lodged todate, and both from finance companies within the NBFI group, namely Mascot Finance and Strata Finance. The combined total exposure for the government is NZD75.00 million. These two finance companies are now in liquidation and their depositors are eligible for claims under the DGS (maximum of claims before recoveries and receivership fees). The Treasury has made a provision of NZD816 million in its upcoming budget to account for potential more failures in the NBFI sector.

The DGS was recently extended to from its initial two year expiry in 2010 to 31^st December 2011, and likely a termination of the scheme thereafter. The Treasury has considered a range of options in the RIS, apart from attempts to minimize fiscal cost and promote financial stability, they have also considered economic distortion (underpricing of risk) and the problems associated with moral hazards in its consideration for an extension. The review by The Treasury is for an “orderly exit” strategy, tighten the original terms and reduce the government’s exposure from potential fail institutions.

Read More about Retail Deposit Guarantee Scheme (DGS”) and the Regulatory Impact Statement (“RIS”) 

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