Minister of Finance Statement to the House
Hon Bill English Minister of Finance
11 December 2008
Minister of Finance Statement to the House
Mr Speaker, I wish to make a ministerial statement under Standing Order 347.
Mr Speaker, I wanted to make a statement to the House at the earliest possible time about the serious international financial situation that has developed over recent months, the impact this situation has had on New Zealand, and the measures that have been taken to address this situation since the House last met. Had Parliament been sitting I am sure the previous Minister of Finance would have informed Parliament of these events at the time.
Developments in offshore financial markets
Since the House last met on 26 September 2008, the world's financial markets have experienced considerable disruption. In particular, confidence in the global financial system has deteriorated markedly and credit markets have become dysfunctional. This affects New Zealand banks which are net borrowers from those markets. Linked to this, global share markets have fallen sharply, and economic conditions in many countries around the world have deteriorated rapidly. The outlook remains difficult.
As members will realise, Governments and financial authorities around the world have taken an unprecedented range of steps to protect financial systems and to minimise (to the extent possible) the adverse economic consequences that are likely to flow from the financial markets. These measures include easing monetary and fiscal policy, supporting banks and financial institutions and enhancing global cooperation on economic and financial issues.
Implications for New Zealand
Of direct relevance to New Zealand, governments in a wide range of countries, including Australia, have moved to guarantee deposits in financial institutions.
Mr Speaker, I would like to today inform Members of two particular steps the New Zealand Government has recently taken.
* Firstly, Retail Deposit Guarantees: As the House had adjourned on 26 September and Parliament had been dissolved on 3 October for the election, it was necessary to use existing statutory powers to take timely action. Accordingly the power in the Public Finance Act 1989 for the Minister of Finance to give guarantees was invoked and was delegated to the Secretary to the Treasury. Under that delegation, the Secretary may issue Crown guarantees for the retail deposits in banks and other financial institutions that meet certain criteria and appear necessary or expedient in the public interest. I can inform the House that retail deposits in all the major banks and many other institutions are now covered by a Crown guarantee. Full details of the guarantee scheme, including the entities it covers, are on Treasury's website. To protect taxpayers the guarantees are limited in time and extent.
I am advised that the amount of deposits covered by the retail guarantee as at 30 November 2008 is approximately $125 billion and the Crown's contingent liability is therefore of that amount. This amount will increase if more retail deposits fall within the scheme. It is extremely remote that anything approaching the full amount would be required to meet the Crown's obligations.
* Secondly, Wholesale Funding Guarantees: New Zealand banks depend heavily on foreign funding, and the wholesale banking markets have been largely closed in recent months. Unless ready access to those markets can be re-established it is likely that pressures on the availability of credit in New Zealand, and on the exchange rate, could intensify next year. The Minister of Finance announced that the Crown will guarantee, using the same statutory power, specific wholesale financial instruments issued by major financial institutions if they meet the specified criteria. Acting under delegated authority, the Secretary to the Treasury must be satisfied that it appears necessary or expedient in the public interest to proceed with a wholesale funding guarantee. Officials are working actively with banks to facilitate use of the guarantee facility.
To date no wholesale deposits have been guaranteed. Advice from Treasury is the wholesale scheme could involve guarantees of up to $150 billion. The scheme is offered on an issue-by-issue basis so would only approach that amount if the scheme continues to be offered for several years.
The Government will continue to manage the scheme carefully on behalf of taxpayers.
In addition to these steps taken by the Minister, the Reserve Bank has taken steps to reduce the Official Cash Rate and focus on its prudential monitoring of banks and non-bank deposit-takers. The Bank has reduced its rate; most recently a 1.5% reduction to 5% on Thursday 4 December. As well, the Reserve Bank has reiterated its confidence that the country's banks continue to be solvent.
Looking to the future
I am sure that the measures taken to date will go a long way to maintain confidence in New Zealand's financial markets and mitigate the effect international trends will have on the economy over the next year.
The recent financial events have unfolded rapidly and may continue to do so We shall be keeping abreast of any such developments and considering any further response should that be necessary, in the interests of the country.