Some details from the RBNZ:

12 October 2008

OPERATIONAL DETAILS

New Zealand Deposit Guarantee Scheme

This document outlines the key characteristics of the deposit guarantee scheme announced by the Minister of Finance this afternoon.  Draft contracts containing the full details of the guarantee will be available on the Reserve Bank’s website later this evening.

The Offer
Under the terms of the Public Finance Act, the Crown will invite eligible institutions to enter a guarantee of their deposit liabilities. Eligible financial institutions, will be New Zealand registered banks and non bank deposit-taking financial institutions, who are fully compliant with the requirements of their trust deeds.

The decision to enter a guarantee with any specific institution, whether now or in the future, will be at the sole discretion of the Crown.

Which deposits will be covered?
For New Zealand incorporated registered banks deposits from both residents or
non-residents, will be covered.

For non bank deposit takers and for the unincorporated branches of overseas entities only deposits of New Zealand citizens and New Zealand tax residents will be covered.

Deposit liabilities will be covered regardless of the currency in which they are denominated.

Deposits and other liabilities owed to financial institutions, whether in NZ or offshore, are explicitly excluded from this guarantee.

How long will the guarantee last?
The guarantee will be offered for a term of two years.

Fees
The government will charge a fee for any guarantee offered on amounts in excess of $5 billion.

For covered liabilities in excess of $5 billion a fee of 10 basis points per anum will be charged for the guarantee.  The fee will be charged on the basis of the total covered liabilities, in excess of $5 billion of the institution.

What will trigger the exercise of the guarantee?
The Crown will make payment in the event of the liquidation of a guaranteed financial institution, if its assets are shown to be insufficient to meet the liabilities covered by this guarantee.

Administration
These guarantees will be offered and administered by the Treasury.

Further Information
For institutions wanting further information on their eligibility for this guarantee please contact the Reserve Bank on: 021 682 757.

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DEPOSIT GUARANTEE SCHEME

Q & A

12 October 2008

What is a deposit guarantee scheme?

It is a facility where the Crown guarantees people who have deposits with institutions in the scheme.  It covers all retail deposits of participating New Zealand-registered banks, and retail deposits by locals in non-bank deposit-taking entities. This would include building societies, credit unions and deposit-taking finance companies.

It only covers deposits and other debt securities.

What is “retail”?

Deposits by anyone other than financial institutions (eg banks and non-bank deposit-takers themselves)

What will it cost?

The scheme will be free for institutions with total retail deposits under $5 billion.  A fee of ten basis points per annum will be charged on total deposits above $5 billion. This means that a bank with $20 billion in retail deposits would pay $15 million in fees per annum.

There is no direct fee for individuals, but institutions will determine if and how the costs of the scheme are passed on

What is the cost to the Crown?

This obviously depends on the degree (if any) to which it is drawn on (like any insurance scheme).  Any guarantees will be recorded as
unquantified, contingent liabilities of the Crown.

Why was the facility announced this afternoon? What precipitated it?

The government has moved today to ensure ongoing depositer confidence in
New Zealand given the international financial market turbulence.   The
New Zealand banking system remains sound.  This move is to give further assurance to New Zealanders that their deposits are safe.  It follows other measures that have been undertaken by the Reserve Bank in recent weeks to ensure the liquidity of the banking system.

Why has this been done without legislation?

Parliament is not sitting, and therefore legislation can’t be introduced.  However, the Minister has powers under the Public Finance Act to act in this way.

Does this apply to non-banks / finance companies?

Yes it does, inasmuch as they meet the criteria (above).  Customers should check with their institution to confirm whether they are going to seek cover.

It does not apply retrospectively.

What about non-residents?

For branches of overseas banks and non-bank deposit-takers, non-residents will not be covered.

Is this scheme comparable with the facility announced in Australia
today?   What about other jurisdictions?

From what we’ve seen, the schemes are different - but both are aimed at encouraging confidence

Where can I go for more information?

Individual customers should talk with their banks or non-bank institutions.

News just out today that the NZ government will provide a guarantee for all bank desposits. Details are sketchy but it seems it is opt-in and will cost banks a small amount.

It was inevitable but good to get it up front and out of the way. It could actually see money flow into NZ from overseas where deposit insurance schemes have a limit on them.

At least Kiwis can sleep a little better this evening presuming their bank opts in to the framework. More on this tomorrow.

We’ve talked often on this blog about the necessity to have confidence in the banking system. Paper money is, after all, just paper.

There’s no point playing the blame game. It’s all about what we do now.

Although G7 and the IMF have gone to full battle stations the reality is the die is cast. Markets have crashed, liquidity has disappeared, credit is history and the revaluation and squaring up of positions has to somehow be undertaken.

The margin calls will be coming thick and fast next week. The derivatives nightmare is a beast matched only by the legendary Hydra. Each cut brings forth two new disasters.

The choices facing policymakers are stark and , for them, almost unbelievable.

- Public interest free money will need to be pumped into the system. Not to cover debts but to provide a boost to a money supply which is disintegrating as loans are written off. This should not be a bank bailout but a reconstitution of a money supply from the public. Banking for now is suspended and banks are likely to be worth very little unless they are very well capitalised and have little exposure to falling asset prices. Bank deposits will be uncondtionally guaranteed under this approach.

- Stock markets: Next week will see a wave of selling that can only be described as a death spiral. It is hard to see any approach other than freezing all global stock markets. The alternative is for governments to start buying stocks i.e. nationalisation of business. That would be a very big call but is possible.

_ Currencies: There are potentially very crazy moves ahead. Deficit countries will see huge sell offs so some kind of coordinated intervention will be needed here. It may not be physical but more a guarantee between creditor and debtor nations to maintain current levels.

This is going to be a momentous week. Let’s hope policymakers are up to the task .

Either way

As banks continue to go down and credit default swaps unwind it has become clear that we have experienced a crash. Not a one day cataclysm a la 1987 but a more sustained and painful ratcheting down of markets. It’s like being stuck in a falling elevator which shudders to a halt every 10 floors before lurching further down.

Each stop feels like the last but it never is.

After a horrendous week G7 has responded with a new pledge to do whatever it takes.

The question is will they? Do they know what it’s going to take?

They already said this back in April.

It seems to me that the numbers are no long relevant.The game has been up for some time now.

Everywhere you look monetary authorities are looking to buy something whether its banks or stocks.

Forget it…..some banks arent worth it. Deposits in major banks should be guaranteed. That is people’s money not an investment (well it is sort of but not for most).

Stocks should go down to wherever they go down to. The US via the Plunge Protection Team has supported the equity markets for too long.

They should let it act like the market it is supposed to be. Once leveraged trading is stripped out out the market we can go back to buying stocks in a normal investment manner.

As i keep stressing the financial system has been nationalised in all but name. Psycholigically that is hard to take for many because nationalisation is a dirty word to many in the markets, just as priviatisation is to others.

Money is a national tool. Regardless of the shennanigans around the BIS and the Fed and their accountability to government and citizens, we can assume that governments will reassert their sovereign right to coin.

What is interesting in the G7 communique is Point 3:

“3. Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.”

I like the inclusion of “public” sources.

I think we can expect more and more public money flowing into banks coffers.

Part nationalisation is already here. Depending on how the markets fare from here will determine how far this goes.The margin calls are coming thick and fast and the only place to get cash is from equities. Given the lack of concrete proposals (let’s face it all they are saying is that they’ll bring loads of ambulances) markets will continue to tremble.

The timing has never been better for a sovereign reassertion of the right to create money.

On the US the AMI continues to work on its American Monetary Act and in the UK the Forum for Stable Currencies promotes its series of EDMs on Public Money. More and more we need constructive proposals that can be presented to Government for debate.

There is no time to waste.

Whilst all the focus has been on the negotitations around the bailout of the US financial system the biggest bank failure in US history passed without fanfare.

Washington Mutual collapsed on Thursday and had its assets sold to JPMorgan for $1.9bln. Not much to say really.

Over the weekend, Bradford and Bingley, a British insititution, was nationalised by the government.

Next up.

Fortis, The Belgo-Dutch financial services company, received in Eur12bln infusion from Belgium, Dutch and Luxembourg governments his morning. It’s only just out on the wires so you’ll have to keep searching for up to date information.

As credit lines dry up this will only continue. As anyone who has read John Tomlinson’s paper in the research section will know, it’s all about confidence.

If we don’t have confidence in banks then they will fail.

Why? Because our whole financial system is based upon fractional reserve banking.

Less than 3% of the actual money supply is real “cash” money. The rest is just numbers on a spreadsheet. In reality its all the same. But cash will always rank above digital money in a system which loses confidence.

Of course one can then ask what is the value of cash, a bit of paper which simply offers itself as legal tender and will be accepted in return for more of the same.

It’s clear that banks have created money to purchase assets that have fallen in value. That’s the basic issue here.

So the equity on their balance sheets has fallen.

Nothing can change that. Adding to that is the fact that capital ratios are already at historic lows so many banks are operating right on the edge. For banks like Northern Rock and Bradford and Bingley who operate by borrowing from the wholesale market it is the end.

They have no chance at all of acquiring the capital they need to function.

The solution is remarkably simple.

Throw out Basel II which is a crock and raise banks’s capital requirements.

Stablilise the system and create a more stable environment.

As Nancy Pelosi said “the party’s over”.

There seems to be some suspicion around the Fed’s balance sheet at the moment and questions are beginning to be asked about its capital adequacy.

It’s dolling out cash like sweets at a birthday party. Where is it all coming from?

Last week bank borrowing from the Fed reached an average of $188bln a day!!

All the primary dealers (all 3 of them GS, MS and ML) were in at their teat, the Primary Dealer Credit Facility, for over $100bln.

This is the stuff of legend.

Parker Brothers will be rushing out new Monopoly sets soon with an extra 6 zeros added.

To say the banking system is on life support would be an understatement. Its actually getting CPR……one billion, 2 billion, 3 billion…………

Even the Fed must run out of cash at some point.

Sure the Treasury can sell more paper….but whoa……who is going to keep funding the US Treasury in order to buy toxic paper from the banks?

Who will bail out the Fed?