New Zealand (“NZ”) introduced the Retail Deposit Guarantee Scheme (“DGS”) at the peak of the global financial crisis in October 2008 as a join global response to address rapidly decline in confidence in banks. The DGS complement existing financial safety net and was necessary to guarantee to all depositor’s of banks and other financial institutions to shore up market confidence. In particular, it was especially relevant to the Non-Bank Financial Institutions (“NBFI”) sector to prevent further collapses of finance companies, as savers and investors exit from investments that are not guaranteed. Without the DGS, the market would have experienced immediate total collapse and failures in the finance companies sectors at the time. Prior to the crisis, the sector was already experiencing severe stress and was facing a “silent” run on deposits, while some of are in liquidation and others are in receivership.
The DGS initial term was for two years but was recently extended to the end of 2011, to allow more time for the finance companies to restore their financial position, tighten the initial terms and signal for an “orderly” exit of the scheme. This paper concludes that NZ should implement a formal Explicit Deposit Guarantee Scheme (“EDGS”) as the “exit” or “wind down” strategy of the current DGS.
Our research analysis shows gaps in the financial environment requiring a policy response in addressing these failures. Despite, making substantial developments in financial transparency and disclosure, there still exist groups of uninformed and unsophisticated investors in NZ that are most affected when financial institution fails and their deposits disappears, thus requiring protection from harms way. Next, is the “non-level playing field”, between the very large foreign banks and the smaller local institutions that can cause “fatal” liquidity traps for the smaller local institutions when capital and funding dries up in times of crisis. In this regard, our argument for the implementation of an EDGS is valid: Firstly, to provide some level of ongoing support as a form of consumer protection and Secondly, as a form of measure to address the uneven level of development in the financial system.
Our paper begins with a quick overview of the financial crisis and regulatory framework, followed by rationale for deposit guarantee. Based on our analysis and evaluation of alternatives, we recommend a preliminary EDGS design that suppost our needs. We also proposed directions for detail review and suitability study of the EDGS to be conducted by the government.
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