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Deposit guarantee scheme gets tweaked

Changes have been made to the original Government deposit guarantee scheme allowing firms to offer both guaranteed and non-guaranteed deposits.

Wednesday, November 18th 2009, 10:49PM

by Paul McBeth

The changes, announced by Treasury gives non-bank deposit takers a "stand down" period in the face of a potential default before invoking the scheme.

Also participating financial institutions the ability to offer both covered and uncovered debt securities, as well as giving them a 14-day stand down period to allow a company under threat time to avoid receivership if it's able to resolve its issues.

The tweak also gives the government the ability to set a timeframe for claims to be made once a guaranteed deposit has been defaulted.

"Existing investments by eligible depositors are not affected by these changes - they continue to benefit from the current Crown guarantee," Treasury's director of financial operations Brian McCulloch said in a statement. "This change provides greater flexibility for deposit taking entities and improves consistency between the current scheme which ends on October 12 2010 and the extension scheme."

The changes announced today are being made to the scheme set up by the previous government in the 2008 election campaign. Institutions wanting to keep their guarantees for deposits made after January 1 need to sign the new trust deed by December 4.

Finance Minister Bill English announced earlier this year that the orginal (and now amended scehme) will be extended out until the end of 2011, but with stricter conditions and higher costs. One change in the extended scheme is that deposit takers will require a BB or better credit rating to participate, and will face more punitive charges if they keep the coverage.

Marac confirmed it will take up the amended scheme. PGG Wrightson, and chief executive Jeff Greenslade said the "changes provide deposit taking institutions more flexibility under the scheme and we are supportive of the amendments."

The Treasury announced it increased provisioning for the retail deposit guarantee $35 million to $863 million in the three months ended September, with some 73 institutions covered and deposits totalling $124.3 billion.

Last week the Reserve Bank said it expects there to be some failures among finance companies covered by the retail deposit guarantee as they come to grips with the central bank's new prudential requirements which come into effect next year. Under the regime non-bank deposit takers will need to have a credit rating issued by Standard & Poor's, Moody's Investor Services, or Fitch Ratings, and will have to keep an 8% minimum tier 1 capital ratio.

Paul is a staff writer for Good Returns based in Wellington.

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