Guarantee scheme payout is insurance premium

Finance Minister Bill English made a Ministerial Statement to parliament  on South Canterbury Finance yesterday in which he explained the background to the Deposit Guarantee scheme.

While the Crown has had to make good its guarantees to depositors, it will recover some of the proceeds out of receivership. Once the receivership is finished, this will largely complete the cycle that began in October 2008.

When the fees collected from the wholesale and retail guarantee schemes are included, the net cost is likely to be between $300-$400 million.

While this cost to taxpayers is considerable, this expenditure did help prevent the potential collapse of the financial system.

In the light of ongoing bank bailouts around the world, this net cost is the premium our economy has paid to avoid potential catastrophic losses to the taxpayer over the last 18 months.

In other words it was like paying insurance.

It’s easy to forget just how fragile the international economy was when the Deposit Guarantee Scheme was put in place.

Once Australia had one, New Zealand had to follow to forestall a run on banks here. Once we had the scheme the government had to honour the commitment first made by Labour when it introduced it and it’s done it in a way to minimise the cost and damage to the wider economy.

As this week’s Listener editorial says:

SCF went broke for all the usual reasons that companies go broke – bad management, weak governance and hubris.

In fact, confronted with the inevitability of SCF’s collapse, the Government’s response has been deftly focused on settling investor fear and limiting the economic fallout.

The government is now in control and that means there will be no fire sale of assets which is important to maximise the return from the companies and farms SCF owns.

3 Responses to Guarantee scheme payout is insurance premium

  1. pdm says:

    HP – are you sure the Government is in control.

    Once Receivers are appointed they take over fully and I assume tha is the case here – leaving the Government in some sort of preferred crditor position.

    Receivers also charge like wounded bulls so I hope there is something left for the government.

    It is also not an insurance payout. Once an insurance company settles on a policy claim the recipient does not have to pay anything back. Unless it is a fraudulent claim of some sort.

  2. homepaddock says:

    Bill said: “These decisions were taken for commercial reasons. They avoided the need to pay ongoing interest that otherwise would have accrued over many months or years as investors submitted claims, and also the risk that receivership might be controlled by prior charge holders, to the potential disadvantage of the Crown.”

    My understanding of that is that paying out prior chrge creditors means the government is now the one receivers have to answer to.

    The insurance metaphor isn’t referring to a payout but a premium ie this is what was paid to safeguard our financial system.

  3. pdm says:

    It will be interesting to see this play out HP – I am always sceptical when receivers are appointed and in this case I think Statutory Management would be better.

    I still do not think it should be called an Insurance Scheme – it is more like the Air NZ bailout – an injection of capital by the Government from which a return is expected.

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