Banks or Government Guarantees?

Banks or Government Guarantees - where will the investors dollar be?

Now that the wholesale guarantee for banks is gone and the Crown retail deposit guarantee scheme has been extended to the end of 2011 it will be interesting to see what happens to the New Zealand money market and which way investors go.

The collapse of the finance industry last year saw people voting with their feet and shifting their money to the less risky banks but now that the banks are no longer government guaranteed and the finance companies with a BB rating or better are gaining approvals to extend their Crown guarantee it will be interesting to see what happens next.

This could be good news for investors as the finance companies will need to offer attractive interest rates to lure people away from the comfort of having their money in the bank. On the other hand banks will need to sharpen their pencils to remain competitive now that the finance companies that get the Crown guarantee extension are able to offer effectively risk free investments up to the limit of $250,000 per depositor per institution.

For many of the baby boomers getting a good interest rate for their nest egg is vital if they are to maintain their standard of living and the offer of a higher interest rate from the finance companies will be very tempting. Also, as only the finance companies with a BB rating or better qualify for the extension, the risk of these companies going under is a lot less likely than the risk from a finance company without the guarantee. This could be good news indeed for the finance companies that make the grade.

ENDS

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