Wednesday 9 November 2011

Deposit guarantee redux

Bryce Wilkinson takes over the the NBR column at the National Business Review; it's now online at Breaking Views. Bryce takes the prior government to task for its decision to subsidize dodgy finance companies:
The largely ignored second question was whether the guarantee was under-priced for no good public interest reason. It is clear now that it was knowingly under-priced. On 10 October 2008, officials put a ball-park $1.6 billion figure on the cost of a wide-ranging retail deposit guarantee.

Officials proposed charging risk-related fees to those taking up the guarantee offer. An additional reason was the fear that deposits would otherwise move perversely from low-risk banks to higher risk non-banks.

Yet from 12 October the government determined to offer retail deposit guarantees with no charge to non-bank deposit-taking institutions. Given the known condition of those institutions this was a major expenditure decision.

On 15 October 2008, the Treasury estimated that the chosen guarantee scheme could cost between $462 million and $945 million. In the fully-audited Crown financial statements for 30 June 2009 the liability was estimated to be $0.8 billion. (The eventual losses from South Canterbury Finance were larger than were implicit in this calculation, but this is a case of being wise after the event.)

So what justified the failure to charge a fee commensurate with the anticipated losses? The Auditor-General's report is largely silent on this question. It euphemistically observed that "the Minister [of Finance] preferred a flatter fee structure". Well, what was the public interest justification for this preference?
There was none. Bryce nails it in the conclusion:
In short, an awful precedent has been set for taxpayer bailouts for investors who have chased higher returns and the question of whether there was a good reason for the failure of the government to price risk accurately has yet to be answered satisfactorily.
That New Zealand's Occupy-Wall-Street emulators haven't focused their attention on this debacle speaks to their economic illiteracy.

1 comment:

  1. Even at the time there was criticism of the lack of risk pricing - making it a prime candidate for criticism now IMO.