New Zealand’s Wholesale Funding Guarantee

In addition to the Wholesale Funding Guarantee Scheme, which was announced on November 1, 2008, the government of New Zealand also announced the Retail Deposit Guarantee scheme on October 12, 2008, which covered “all retail deposits of participating New Zealand–registered banks as well as retail deposits by eligible depositors in nonbank deposit-taking entities, including building societies, credit unions, and finance companies.”  Institutions seeking to participate in the Wholesale Funding Guarantee were expected to have applied for a guarantee under the Retail Deposit Guarantee Scheme.

New Zealand authorities were able to establish the scheme based on standing legal authority provided in the Public Finance Act of 1989.

Program documents contained no cap on the amount of guaranteed debt that could be issued pursuant to the scheme.

The purpose of the Wholesale Funding Guarantee Scheme was to re-establish access to international funding markets, and New Zealand authorities expressed a belief that these eligibility requirements would capture all institutions reliant on such markets in the years leading up to the crisis. Authorities further noted that a small number of nonbank financial companies would likely be eligible as well, but none participated.

Branches of foreign banks were eligible to participate in the Wholesale Funding Guarantee Scheme given their significant role in New Zealand’s domestic bank bill market, but to help ensure that the scheme wasn’t used to fund a branch’s wider group, foreign branches could make guaranteed issuances only in New Zealand dollars.

There was also a requirement of an additional capital buffer, which was intended to protect the government as guarantor. The buffer defended against the risk that the capital position of financial institutions was depleted during the period of the guarantee. Guaranteed “locally incorporated, registered” banks were required to maintain a Tier 1 capital buffer at 2 percent over the required minimum. If a bank failed to maintain the additional buffer, the government would not issue any additional guarantees to that institution. Any non-bank issuers would have their buffers assessed on a case by case basis (Reserve Bank of New Zealand 2008).

Any new issues of these instruments by eligible financial institutions were eligible for coverage under the wholesale scheme. Ones targeted partly or wholly at retail investors were also included.

New Zealand authorities had initially contemplated a three-year maximum guarantee term. However, authorities became concerned that this would concentrate maturities and preclude New Zealand institutions from accessing a substantial pool of investors interested in longer maturities.

The government does not appear to have established minimum maturity requirements for eligible debt.

Other currencies could be included but had to be applied for and were considered on a case by case basis.

This figure was the stated limit on guarantee coverage for New Zealand financial institutions. The limit was intended to protect the government against the risk that banks attempt to increase their funding solely on the basis of the guarantee. The constraint was also designed to protect against the risk that NZD issuance by New Zealand branches of foreign banks under the guarantee might be used to fund the activities of the broader groups.

New Zealand authorities intended the guarantee fees to facilitate access to the scheme as long as market conditions remained difficult, while encouraging a return to non-guaranteed issuance as soon as market conditions improved. Fees were lower for securities with shorter terms reflecting the lower market prices for credit risk on loans of shorter maturity. Riskier loans warranted significantly higher fees than more secure ones, to cover the risk of default. Guarantees for loans in NZD were more expensive than ones in other currencies, reflecting the stated purpose of the facility to increase New Zealand institutions’ access to international capital markets.

Authorities concluded that the initial fee schedule associated with the Wholesale Funding Guarantee Scheme resulted in fees that were too high. Shortly before the program launched, an initial modification to the schedule reduced the fees associated with short-term issuances by 15 bps to better reflect normal market pricing and to more closely match the fees charged by other countries (particularly Australia). Then, in January 2009, with no guaranteed issuances having yet been made, New Zealand reduced the fee for short-term issuances a further 15 bps and cut the fee for longer-term issuances by 50 bps. The stated rationale for these cuts was the high cost of issuing even guaranteed debt. Authorities also noted the fact that the fees as reduced were more in line with other countries’ fees.

The final fee schedule associated with the program is shown in Figure 2.

This commitment was intended to protect against the risk that banks might attempt to concentrate issuances in short-term maturities, for which the guarantee fee was lower. To enforce the rule, the government stated an intent to closely monitor the issuing activity of participants. Furthermore, the government retained the power to adjust the pricing structure of the guarantee to potentially counteract any maturity concentration.

New Zealand viewed its fee structure as precluding the need for a pre-established deadline on guaranteed issuance, with its emphasis on imposing costs that would make guaranteed issuance prohibitively expensive once conditions improved. In response to such improvements and based on the observation that institutions were again able to access funding without resort to the guarantee, authorities announced on April 30, 2010, that no new guarantees issuances could be made.