Bill English

Wellington, Aug 25 NZPA - Finance Minister Bill English says some finance companies will find the next few years "challenging" as they try to meet a new regulatory regime and changes to the retail deposit guarantee scheme.

Mr English announced today that the retail deposit guarantee scheme will be extended in revised form until the end of 2011.

The current scheme ends on October 12 next year and the extended scheme announced today would change from that date.

The scheme would become voluntary and higher fees would be charged for lower credit ratings.

Those with a lower rating than BB would not qualify.

The maximum bank deposit per person would also reduce from $1 million to $500,000 and to $250,000 per non-bank deposit.

Over 80 institutions are covered by the scheme, with many of the smaller finance companies benefiting from it at little or no cost.

In total, more than $120 billion of deposits from around 3.5 million depositors are covered by the guarantee.

The changes to the scheme will follow a new regulatory regime for non-banking institutions being overseen by the Reserve Bank, which requires all finance companies with more than $20 million in assets to get credit ratings.

The new regulatory regime was sparked by the collapse of a number of finance companies and some are still struggling as they cope with the credit crunch in the wake of the international financial crisis.

Mr English warned finance companies that he was giving them time to sort their businesses out.

"Any institutions who are covered by the guarantee need to focus on getting their affairs sorted out," Mr English said.

"They will need to prepare for a time past 2011 when there will be no guarantee. Some of those institutions may find that a challenge, but the intention of the guarantee is to protect the depositors on the way through."

The changes and the notice given would allow for an orderly transition.

"Some institutions may choose not to apply for the extended scheme and some won't meet the application criteria," Mr English said.

Mr English said the Government had paid out $68 million to cover guaranteed deposits, and had received $64 million in fees from financial institutions in its first eight months of operation.

The wholesale deposit guarantee, which banks use to attract large loans for their lending, was still being used by banks, but Mr English believed this would wind down over time as banks no longer needed it.

He believed the "high stress" point of the financial crisis had passed but there would still be shocks and surprises as the world economy overcame the massive loss of capital over the past year.

All countries were facing common problems and it was important there was a global response to the issues raised by the crisis.

The decisions today largely aligned policy with that of Australia, Mr English said.

Labour's finance spokesman David Cunliffe said it would be preferable to make the major banks stay in the scheme so the fees repay taxpayers for their support.

Covering institutions with sub-investment credit ratings as low as BB while allowing the larger banks to pull out would leave taxpayers underwriting riskier assets.

Mr Cunliffe indicated that the Government should have sought lower interest rates in return for the guarantee schemes.