Treasury should have limited finance company deposits: AG
Treasury should have acted to limit the amount of deposits flowing into finance companies after the government's retail deposit guarantee scheme was introduced in October 2008, auditor general Lyn Provost says.
Tuesday, October 4th 2011, 10:46PM
by Jenny Ruth
In her report on the scheme, which has cost the government about $2 billion in payouts to depositors, Provost says Treasury officials recognised from the outset the guarantee could result in finance companies having less reason to minimise risks.
One finance company's deposits grew from $800,000 to $8.3 million under the scheme and the company which caused the government the greatest costs, South Canterbury Finance, saw its deposits grow 25% after the scheme was introduced, she says.
While the scheme's primary goal was to secure depositor and public confidence, “financial prudence should still have been a significant consideration,” Provost says.
“We consider the evidence of increasing deposits and liability should have prompted some policy work.”
The scheme, instituted in the wake of the global financial crisis, involved the government guaranteeing up to $133 billion in investor funds and succeeded in ensuring none of the local banks failed.
Provost's report discusses the urgency with which the scheme was implemented – “the first few weeks were hectic” – and says Treasury's work in putting it in place was “commendable.”
Nevertheless, “this task was done at the expense of setting up good governance arrangements.”
Treasury secretary Gabriel Makholouf says the scheme was put in place “very rapidly and during a very difficult time” and his department's management was “good, but not perfect.”
Treasury disagrees with “the assertion that more intervention in finance companies may have reduced the fiscal risks that were an inevitable consequence of the scheme,” Makhlouf says.
“Treasury considered considered a range of further interventions but couldn't find a case where intervention was more likely to create a better outcome,” he says.
“All interventions carry a degree of risk and we don't believe that the auditor general's report gives sufficient weight to the risks that further interventions would have created.”
Provost estimates the government should recover about $0.9 billion of the $2 billion it has paid out under the scheme.
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