Part 3: Introduction of the Crown Retail Deposit Guarantee Scheme

The Treasury: Implementing and managing the Crown Retail Deposit Guarantee Scheme.

3.1
In this Part, we discuss:

3.2
In summary, the Government was acting to maintain confidence in New Zealand's deposit-taking institutions when it introduced the Scheme. Minimising the Crown's losses was recognised as important in early documents but not, in practice, treated as one of the Scheme's objectives. Although a guarantee scheme was not consistent with New Zealand's minimal interventionist approach to financial markets, the Government decided that such a scheme was necessary after the Australian Government announced that its scheme was imminent. Once the decision to have a scheme was made, officials considered that including finance companies was necessary but would risk substantial Crown losses and could encourage those companies to make even riskier investment decisions.

3.3
The design of the Scheme saw the Crown acting as a guarantor. The Crown assumed the responsibility for repaying investors' deposits if financial institutions covered by the Scheme failed. The Scheme did not guarantee the solvency of those financial institutions.

3.4
In our view, the Treasury's focus for the first six months – when the risk to the economy was greatest – was administrative and reactive rather than comprehensive and well planned. The Treasury rightly processed applications to join the Scheme quickly, to maintain confidence in the financial system. However, it did this without a disciplined project management approach to the Scheme. Although the Treasury acknowledged relatively quickly that it did not have people with the necessary skills to implement the Scheme, it did not do enough to quickly fill that gap.

3.5
If the Treasury had implemented the necessary monitoring, escalation, and reporting framework as it worked to process applications, we consider the Treasury would have been better prepared when risks that it had long known about began to eventuate (see Part 6).

3.6
The Treasury told us that it is now taking a more structured approach in its response to crisis situations (such as its work on government support for AMI Insurance Limited).

Why and how the Scheme was introduced

The days leading up to 12 October 2008

3.7
In the days and weeks leading up to the Scheme, New Zealand's financial system was under considerable pressure (described in Part 2). A joint report from the Treasury and the Reserve Bank to the Minister on Friday 10 October 2008 (the Options Report) set out possible policy responses should the situation deteriorate further. The Options Report set out the broad design of a retail scheme. The Options Report stated that a retail deposit insurance scheme could be implemented quickly but was not needed at that time. The Options Report said that introducing such a scheme could distort investment choices and unnecessarily risk a downgrading of New Zealand's credit rating.

3.8
The Options Report also noted that introducing a retail guarantee scheme would mark a material departure from New Zealand's approach to supervision and regulation, and change expectations about the Government's response to future crises and institutional failures. Although not stated directly, implicit in the Options Report was a concern that a guarantee scheme could introduce a "moral hazard" into the financial system. In other words, there were concerns that setting up a scheme that transferred risk to the Crown would provide depositors with incentives to invest in riskier financial institutions than they would otherwise. This would in turn allow the riskier institutions to make riskier investment decisions.

12 October 2008

3.9
On Sunday 12 October 2008, officials were told by their counterparts in Australia that the Australian Government was likely to announce the introduction of a guarantee scheme later that day.

3.10
We understand that Australian and New Zealand officials had discussed earlier that week possible courses of action should the global financial crisis worsen. The advice from Australian officials of the Australian scheme's introduction was unexpected and invoked a flurry of activity by the Treasury and the Reserve Bank to prepare a similar announcement. Officials believed that, if the Government did not act quickly to implement a similar scheme, depositors would quickly transfer their funds from New Zealand to Australia to benefit from the Australian deposit guarantee. This could have resulted in runs on New Zealand banks and other financial institutions, and given rise to significant liquidity difficulties in financial institutions. This, in turn, could have led to substantial and widespread market disruption and economic instability.

3.11
During that Sunday, the Treasury and Reserve Bank worked to design a scheme, with guidance from the Minister. We were told it was a tense day, with significant pressure on all parties to achieve a workable solution by Sunday evening.

3.12
There was limited opportunity to fully explore the consequences of the various policy decisions made, such as which types of financial institutions would be offered the guarantee and how much financial institutions would need to pay to the Crown for the guarantee.

3.13
The Scheme was announced on the evening of 12 October 2008 by the then Prime Minister. This was followed by a media statement issued by the Minister. Further information was released in a media statement from the Reserve Bank and the Treasury, and in an initial "questions and answers" document posted on the Reserve Bank's website (see Figure 6). On 1 November 2008, the Crown also introduced a Wholesale Guarantee Scheme.11

3.14
Initial draft guarantee deeds were available on the Reserve Bank's website later in the evening of 12 October 2008. The deeds set out the terms under which the Crown would guarantee the deposits of the financial institution, as well as the circumstances under which the guarantee could be withdrawn.

Figure 6
Details of the Crown Retail Deposit Guarantee Scheme – 12 October 2008 media statements

A media statement released by the Minister of Finance on 12 October 2008 noted that the Scheme:
  • was designed to give assurance to depositors given prevailing uncertain international financial market conditions;
  • would be introduced by the Minister using his powers under the Public Finance Act 1989;
  • would be an opt-in scheme and would take the form of a contractual agreement between the Crown and the individual institutions that took up the guarantee;
  • would have an initial term of two years;
  • covered all retail deposits of participating New Zealand-registered banks and retail deposits by New Zealanders in non-bank deposit-taking financial institutions (building societies, credit unions and deposit-taking finance companies);
  • would be free for institutions with total retail deposits under $5 billion, but institutions with total deposits above $5 billion would be charged fees; and
  • would not cover related party liabilities.
Additional details released on 12 October included:
  • eligible financial institutions included registered banks and NBDTs that were fully complying with their trust deeds;
  • or registered banks, deposits from both residents and non-residents would be covered;
  • for NBDTs and for the unincorporated branches of overseas financial institutions, only deposits of New Zealand citizens and New Zealand tax residents would be covered;
  • deposits were covered regardless of currency; and
  • deposits and other liabilities owed to financial institutions, whether in New Zealand or offshore, were explicitly excluded.

3.15
The reference to the Public Finance Act 1989 (the Public Finance Act) in these early media statements was important. Under section 65ZD of the Public Finance Act, the Minister, on behalf of the Crown, may give a guarantee in writing if it appears to the Minister to be "necessary or expedient in the public interest" to do so. The Minister delegated the power to give guarantees under the Scheme to the Secretary to the Treasury.

3.16
Using the Public Finance Act established overriding criteria for granting the guarantee. It also assigned the role of administering the Scheme to the Treasury (because of the Treasury's role as overseer of Crown funds). Other mechanisms, such as new legislation, would have taken time and were not possible, because Parliament had been dissolved.

Which types of financial institutions could apply under the Scheme

3.17
The designers of the Scheme considered which financial institutions would be eligible to apply for the guarantee. This was an important policy decision because it affected how the Treasury would implement the Scheme. It is also a commonly asked question in the light of the nine finance company failures that have triggered payments under the Scheme.

3.18
For the Scheme to give depositors confidence, it was clear to the Treasury and the Reserve Bank that, as a minimum, registered banks should be guaranteed. It was less clear to them whether NBDTs should be part of the Scheme. Changes to the regulatory framework for NBDTs were only just under way, and the finance company sector had experienced difficulties in the preceding two years, with many company failures.

3.19
The Options Report had considered which financial institutions should be eligible to apply for a guarantee. The Options Report recognised, on the one hand, that the NBDT sector was sufficiently small not to require inclusion for the purpose of maintaining public confidence. Moreover, including the NBDT sector under a form of guarantee would significantly increase the risk to the Crown and increase the likelihood of the guarantee being invoked. Unless the pricing of the Scheme was appropriately structured, it could also encourage depositors to shift deposits from banks to NBDTs where the rates of return paid on deposits would be higher.

3.20
On the other hand, excluding NBDTs would very likely trigger a flow of funds from NBDTs to the banks. Implicit in the Options Report seemed to be a concern that a government initiative that did not include NBDTs might risk causing the failure of a sector that was broadly regarded as necessary and as adding to the diversity of the financial system.

3.21
Therefore, the Options Report recommended that any guarantee scheme include banks and NBDTs. This recommendation, combined with a number of the proposed scheme design features, was agreed to by the Minister, subject to confirmation of the risk-based fee.

3.22
On 12 October 2008, the Government decided to include in the Scheme all banks and NBDTs that met some basic eligibility criteria. Including the NBDTs meant that the Scheme guaranteed a broader range of financial institutions, with a higher risk profile, than most guarantee schemes elsewhere in the world. In part, this reflected the important role that finance companies were believed to play in New Zealand. It also meant a higher likelihood of the guarantee being invoked.

Refining the policy

3.23
After the Scheme's introduction on 12 October 2008, numerous policy issues emerged for which decisions needed to be made promptly. Early media statements about the Scheme suggested that the Treasury and the Reserve Bank were jointly responsible for making decisions about the design of the policy, because details were released jointly by the Treasury and the Reserve Bank.

3.24
Early policy decisions were mainly about the treatment of NBDTs and other non-bank entities, the price of the Scheme, and the extent of its coverage. Issues included the additional fiscal risks posed to the Crown by including NBDTs in the Scheme, the boundary between retail and wholesale deposits, and the need for risk-based pricing in the NBDT sector.

3.25
The Treasury and the Reserve Bank issued a joint media statement on Wednesday 15 October 2008 to refine the initial design of the Scheme. Details of this release are provided in Figure 7. Amended guarantee deeds were also made available on the Treasury's website on October 15.12

Figure 7
Details of the Crown Retail Deposit Guarantee Scheme – 15 October 2008 media statement

On 15 October 2008, the Treasury and the Reserve Bank issued a joint media statement to announce additional details about the Scheme. Among other things, these included:
  • tighter requirements for NBDTs:
    • limiting the potential to strip out funds (for example, to pay dividends);
    • increasing reporting requirements;
    • allowing the Crown to appoint an inspector;
    • allowing for withdrawal of the guarantee on the basis of reckless business behaviour that would be deemed to be in breach of the guarantee terms; and
    • personal undertakings from directors about NBDTs' compliance with the guarantee deed;
  • introducing a fee for NBDTs that either were rated below BB or did not have a rating;
  • a requirement that all new entrants to the Scheme be rated BBB- or better; and
  • extended (conditional) coverage to non-resident deposits in New Zealand branches of overseas banks and to certain collective investment schemes.

3.26
The Treasury and the Reserve Bank released a further media statement on Wednesday 22 October 2008. This statement set out the decision to introduce a cap on deposits covered by the Scheme (in line with a cap of A$1 million about to be introduced by the Australian Government). It also announced a decision to charge those financial institutions not otherwise subject to fees a risk-based "new business fee". If an institution's balances increased by more than 10% a year, the institution would be charged the new business fee on the amount of the increase.

3.27
We have not seen any definite evidence that the Treasury considered the option to guarantee only existing deposits of NBDTs. The Options Report did not raise this as a possibility. It was mentioned in a report dated 21 October 2008 from the Treasury and the Reserve Bank, in the context of alternative pricing structures. The analysis was that this option would be difficult to effect because of the need to distinguish between guaranteed and non-guaranteed deposits. The only other reference to the new business of NBDTs was in relation to risk-based "new business fees".

3.28
To restrict the guarantee to NBDTs' existing business would have been counter to the objective of maintaining public and depositor confidence in the financial sector; new funds would have been directed only to financial institutions to which the guarantee applied or that were otherwise regarded as safer. Further, existing depositors whose deposits were guaranteed may have questioned the Crown's confidence in these NBDTs and, where they could, moved their funds to fully guaranteed entities so that any increases in their deposit balances would also be covered. If deposits in NBDTs matured and were not reinvested with them, the NBDTs would have faced shortfalls in liquidity and most likely have failed, effectively negating the objective of the policy decision to offer the guarantee to NBDTs.

3.29
The 22 October media statement also indicated that the Reserve Bank would investigate options to bring forward prudential requirements for NBDTs. This followed growing recognition of the fiscal risks faced by the Crown of including NBDTs under the Scheme. An estimate of the dollar amount of this risk (between $462 million to $945 million) was communicated to the Minister by the Treasury on 15 October 2008 and in a paper from the Minister to Cabinet on 17 October 2008.

3.30
Planned actions to manage the risks posed by NBDTs were communicated to the Minister by the Treasury and the Reserve Bank in a joint report on 21 October 2008. The report indicated that the Reserve Bank had identified regulations for minimum capital ratios and limits on related-party exposures as the best option for quick implementation of requirements to impose "‘prudential discipline" on NBDTs. The aim was to have stronger prudential requirements by the end of 2008 or in early 2009, but the last changes are not expected to take effect until 1 June 2013 (see paragraphs 2.32-2.34).

3.31
The Treasury issued Policy Guidelines on 22 October 2008 to help financial institutions that were considering applying for the Scheme and to guide the Treasury's assessment of their applications. The Policy Guidelines set out the overarching principles in granting the guarantee and the main public interest factors (public and depositor confidence). They also set out the types of institutions that would be eligible for the guarantee and the "relevant criteria" and "other factors" that Treasury officials might consider when they assessed an application.

3.32
Relevant criteria included requirements to:

  • have debt securities on issue;
  • be in the business of borrowing and lending or providing financial services, or both;
  • carry out a substantial portion of business in New Zealand; and
  • not primarily provide financial services to, or lend to, related parties and/or group members.

3.33
Other factors to be considered in exercising discretion to offer the guarantee included:

  • the size of the entity and the number of depositors;
  • creditworthiness;
  • related-party exposure;
  • quality of the information provided by the entity and whether its financial statements are audited;
  • character, business experience, and acumen of controlling individuals;
  • business practices and track record of the entity (that is, meets reasonable standards, bank-like in nature, length of time in business, meeting payments, and maintaining solvency);
  • importance to the financial system; and
  • any other factors relevant to the maintenance of public and depositor confidence.

3.34
Officials in the Treasury told us that the "relevant criteria" set out in the Policy Guidelines were items that the financial institution needed to meet before being accepted into the Scheme. The "other factors" were items that the Treasury (and the Reserve Bank) could take into consideration on a case-by-case basis. We understand that the Treasury took this approach so that it could properly assess each application using discretion, as required under the Public Finance Act.

3.35
As the operational details of the Scheme were finalised, new guarantee deeds needed to be drafted. Final versions were issued on 30 October 2008 (after minor amendments). A revised version of the "questions and answers" document was posted on the Treasury's website on 22 October 2008 (the questions and answers were previously on the Reserve Bank's website).

Policy objectives of the Scheme

3.36
The Policy Guidelines issued on 22 October 2008 included a section called "Overarching Principles". This section noted that granting the guarantee must be "necessary or expedient in the public interest". The Policy Guidelines state that the main "public interest" factors to consider were:

  • maintaining public confidence in the domestic financial system; and
  • maintaining the confidence of general public depositors in New Zealand's financial institutions.

3.37
Material changes to the Policy Guidelines were made before the 22 October 2008 media statement, to ensure consistency with the guarantee deeds and in response to Crown Law comments. These changes included adding "depositor confidence" as a key consideration for public interest. A reference to there being no public interest in providing the Crown guarantee to institutions that fail to meet reasonable standards of business practice was also removed.

3.38
The objectives of the Scheme do not refer to the need to minimise the Crown's liability. To include this requirement as an explicit objective could have contradicted the basis for the Scheme, which was depositor and public confidence. However, we consider it reasonable to assume that this was an important consideration for the Treasury in its implementation of the Scheme, given the role that the Treasury has as guardian of the Crown's funds. This assumption is supported by:

  • the Policy Guidelines, which identify financial institution creditworthiness and prudent business practices as considerations for assessing an application under the Scheme;
  • the public interest test, which was interpreted by officials within the Treasury and the Reserve Bank as protecting not only depositors but also public assets;
  • documentation from the Treasury to support operational funding for implementing the Scheme (see paragraph 3.42);
  • the analysis by the Treasury, communicated to the Minister and by the Minister to Cabinet, in the days after the Scheme's announcement, to estimate the fiscal risk of the Scheme to the Crown and to highlight the requirement to disclose the Treasury's objectives, policies, and processes for managing the risk, consistent with New Zealand accounting standards; and
  • our understanding that imposing constraints on weak institutions to stop them making their financial exposures worse was a common feature of deposit guarantee schemes in other countries.

3.39
As the Scheme progressed and financial institutions guaranteed by the Scheme began to fail, the potential cost to the Crown became more important for the Treasury (see Part 6).

3.40
No banks covered by the Scheme failed, there was no run on the money in banks, and investor confidence was maintained during the Scheme.

Implementing the Scheme

The days immediately after 12 October

3.41
The Treasury was responsible for the Scheme's implementation. Before the Scheme was introduced, the Treasury's focus had been largely on providing policy advice and analysis to the Government. The decision for the Treasury to administer the Scheme required the Treasury to have a larger operational role than it had historically played. (The Treasury already had an operational role through its New Zealand Debt Management Office.)

3.42
On the Monday after the Scheme's introduction, the Treasury began developing the operational details for the Scheme. A report provided by the Treasury to the Minister on 13 October 2008 identified several implementation processes and activities, including:

  • details of the application process;
  • resourcing the claims process (both the legal and commercial perspective);
  • monitoring requirements to be placed on successful applicants; and
  • monitoring and reporting requirements to be placed on the Treasury.

3.43
The 13 October 2008 report was followed by a further report from the Treasury to the Minister, dated 17 October 2008, and a Cabinet paper with the same date, setting out additional details of the Scheme's implementation. These documents sought operational funding of $10.1 million and capital funding of $0.8 million.13

3.44
The operational funding was intended to cover legal fees, financial and legal salaries, and other operating costs (including the Reserve Bank's monitoring). The role of the legal and financial staff was to "reduce the Crown's exposure to the Scheme by performing regular monitoring of the financial institutions to ensure they meet the necessary Scheme criteria" and to provide regulatory advice. The capital funding was largely for credit assessment software and computers.

3.45
In mid-October 2008, the Treasury was considering the financial implications of the Scheme (how much the Crown might need to pay if financial institutions covered by the Scheme failed), as well as the expected accounting treatment and legislative basis for reporting the potential amounts. A report from the Treasury to the Minister on 15 October 2008 discussed this aspect of the Scheme, estimating a potential Crown liability between $462 million and $945 million. The report set out the assumptions for these estimates very clearly.

3.46
We have not seen evidence that the Treasury revised its estimates of possible Crown losses until June 2009. We expected updates of these estimates to be an important component of regular reporting, given the Treasury's role as guardian of the Crown's funds.

The role of the Reserve Bank of New Zealand

3.47
The Reserve Bank also played a role in implementing the Scheme. The 13 October 2008 report (see paragraph 3.42) identified where the Reserve Bank could contribute to implementation. (The Reserve Bank was not identified as a co-author of the 13 October report.)

3.48
The two main roles for the Reserve Bank were determining the eligibility of financial institutions for the Scheme and monitoring the financial institutions covered under the Scheme. The Reserve Bank was involved in processing applications to join the Scheme by financial institutions (see Part 4). Its role was to confirm that the institution was eligible to apply and that the Reserve Bank had no reason to believe that entry to the Scheme would not be in the public interest.

3.49
The Reserve Bank's ongoing monitoring role was highlighted in the report but only for any institutions in the Scheme that were already subject to the Reserve Bank Act. The monitoring of NBDTs was not specifically considered in the report. An internal Treasury email dated 15 October 2008 noted the need to agree the Reserve Bank's role in monitoring and advising. However, the Reserve Bank's role in monitoring all financial institutions covered by the Scheme appears to have been first discussed with the Treasury in late October 2008.

3.50
The relative roles to be played by the Treasury and the Reserve Bank were not well defined in the weeks immediately after the Scheme was introduced.

3.51
The lack of clarity about roles was addressed, in part, by the official outsourcing of services to the Reserve Bank on 1 December 2008 through a contract for services. The Reserve Bank was contracted by the Treasury to provide monitoring services and advice on Scheme applicants. The contract between the Treasury and the Reserve Bank was brief and set out the services to be performed by the Reserve Bank, as well as the cost of those services (to be paid by the Treasury).

3.52
Under the contract, the Reserve Bank was to monitor and report to the Treasury on matters relevant to the objectives and administration of the Scheme, and to provide advice on whether applicants met the relevant eligibility criteria set out in the Scheme's Policy Guidelines.14 The description of services did not say how the Reserve Bank was to perform this monitoring task and what form the advice would take. We understand that this was to provide flexibility because the monitoring and reporting tools were yet to be developed.

3.53
In our view, it made sense to outsource monitoring to the Reserve Bank and for the Reserve Bank to provide advice about eligibility. The Reserve Bank was the regulator and supervisor of registered banks. As discussed in Part 2, changes to the regulatory framework for NBDTs were under way that established the Reserve Bank as the regulator of NBDTs (with the trustees as supervisors). Those changes also gave the Reserve Bank the power to request information from trustees about the activities and financial details of NBDTs. Although the Reserve Bank needed to recruit more staff, it already had some capacity to start this monitoring work, which the Treasury did not.

From October 2008 to March 2009

3.54
Between October 2008 and February 2009, the Treasury's attention was focused on assessing and approving applications from financial institutions to be guaranteed by the Scheme. For the Scheme to promote public and depositor confidence in the financial system, it was important that applications were processed quickly.

3.55
During our interviews with Treasury officials, we were told that some Treasury officials were also involved in planning the Scheme (for the activities needed to implement the Scheme) during this period. Much of this work was not documented. From late 2008 to early 2009, we have evidence of budgeting considerations for the staff and external advisers required to implement the Scheme. We are also aware of early effort to recruit legal resources to help primarily with preparing deeds and with the applications process. We do not have written evidence of implementation planning discussions within the Treasury.

3.56
We were also told that regular updates were provided to senior management and that senior leadership team meetings were regularly held to discuss important issues and policy direction for the Scheme. We were told of daily meetings in the early days with the Secretary to the Treasury. We saw evidence of meetings involving Treasury personnel in the legal, policy, operations, communications, and finance teams. We were told that the Secretary to the Treasury attended these meetings, which were often about the signing of the guarantee deeds as well as legal and other broader issues.

3.57
The Secretary to the Treasury was closely involved in the application process for some financial institutions, and we also saw evidence of this involvement in our review of applications. We saw evidence of two Strategic Leadership Team meetings, one in each of October and November 2008 to discuss the organisational strategy and implementation details, but we are unsure of the issues discussed. Much of this detail was not documented.

3.58
From February 2009, we have documented evidence that planning for payout processes was under way. We reviewed notes from meetings on 23 February 2009 between the Treasury and the Reserve Bank to "brainstorm" the payouts process and failure scenarios. We were told that this activity took place before the Treasury learned of the pending failure of a financial institution covered by the Scheme.

3.59
On 2 March 2009, Mascot Finance Limited (Mascot Finance) failed (see Part 4). This was the first failure of a financial institution covered by the Scheme. As discussed in later parts of this report, there was significant effort put into ensuring a smooth payout process in response to this failure (see Part 7).

3.60
In our view, this failure marked a turning point in the Treasury's work on limiting the cost to the Crown – matters that might have been discussed or acknowledged months earlier were actually worked on after Mascot Finance failed.

3.61
We reviewed a number of preparatory briefing notes that were drafted by the Treasury for senior officials in the Treasury, the Reserve Bank, and the Government after Mascot Finance's failure. Some of these appear to have been drafted in response to questions about the inclusion of NBDTs in the Scheme and Treasury's implementation of the Scheme. A Treasury and Reserve Bank report dated 17 March 2009 discusses four implementation "work streams" that were under way:

  • day-to-day operations (including application processing, monitoring of entities, and managing risk to the Crown);
  • crisis resolution and payout;
  • developing an effective and timely way to end the Scheme; and
  • other work (such as financial system issues meetings).

3.62
The "work streams" set out in the 17 March report were activities rather than project work streams. The Treasury did not appear to have a project plan for the Scheme's implementation, with time frames, dedicated resource commitments, performance metrics, and reporting requirements.

3.63
By March 2009, the Treasury was monitoring individual financial institutions (see Part 6) and had hired additional staff with the skills required to do this. There is also evidence that the Treasury was taking a wider view of the Scheme and had identified key considerations in managing the interests of the Crown and ways to exit the Scheme.15 There were several workshops conducted in May and June 2009 to analyse failure scenarios and accompanying responses.

3.64
Also at this time, the Treasury, the Reserve Bank, and the Minister began to meet regularly to discuss financial system issues. They discussed broad issues of financial stability and did not specifically focus on the Scheme. Regulators' meetings, involving the Treasury, the Reserve Bank, the Securities Commission, and the Companies Office were also held. These meetings contributed to inter-agency information sharing and discussion.

Communicating information about the Scheme's introduction

Information for the public

3.65
There was much effort in the early days of the Scheme's introduction to quickly release information about the Scheme and the policy decisions that were made to refine the Scheme's design. Quick disclosure was important given the objective of maintaining depositor and public confidence.

3.66
Both the Treasury and the Reserve Bank were involved in the early announcements immediately after the Scheme was introduced. We were told that the Treasury and the Reserve Bank worked together effectively to ensure adequate disclosure. Because of the Reserve Bank's role in answering queries about regulated financial institutions, the Reserve Bank set up a call centre (with prepared scripts for those answering calls) and responded to enquiries from the public and from financial institutions. The Governor of the Reserve Bank announced the free-call telephone number on radio on the morning of Monday 13 October 2008. (We were told that there were very many calls and much public interest in the Scheme.)

3.67
After the first few days, responsibility for handling public enquiries was passed to the Treasury, but extensive interaction between the Treasury and the Reserve Bank continued. An initial "questions and answers" document was on the Reserve Bank's website. This was then updated and posted on the Treasury's website on 22 October 2008 (and regularly updated by the Treasury).

3.68
Several media statements were released in the first few weeks to inform the public and financial institutions of the Scheme's introduction and key policy refinements. Several of these were joint statements from the Treasury and Reserve Bank. We understand from interviews that there was a concern that excessive public disclosure might unsettle markets further. In our view, the statements were timely and provided useful information about the Scheme's introduction and the changes to policy.

3.69
During our interviews, staff of the Treasury described "typical" NBDT investors as elderly, lacking financial awareness, and possibly lacking Internet access. Some of the people we interviewed suggested that providing information on websites was of questionable use to these investors. We were told that some investors did not realise that the Treasury was the public entity to speak with about the Scheme. However, Treasury staff also said that the cost of conducting a mass-market "brochure" campaign to reach all investors would have been too high. In the Treasury's view, investors would have benefited from the releases into mainstream media as well as information that was provided by the individual entities covered by the Scheme.

3.70
We understand that there was some confusion when Mascot Finance failed. Some people felt that the Scheme was about preventing failure and that Mascot Finance's failure signalled a problem with the Scheme. Others were surprised that Mascot Finance was covered by the Scheme. On balance, we consider that broader use of more readily accessible media sources might have helped minimise this confusion. As a general comment, we found that the Treasury's website was not always well organised and it was not always easy to find information.

Information for Ministers and Parliament

3.71
In the first few weeks of the Scheme, Ministers were kept informed through reports from the Treasury and the Reserve Bank to the Minister, and Cabinet papers. In our view, the information and analysis provided in these reports was extensive and comprehensive, providing enough background detail, supporting analysis, and proposed direction for the various implementation issues that were emerging.

3.72
A Ministerial statement was provided to Parliament on 9 December 2008, and the implementation of the Scheme was debated. It was noted during debate that there were no surprises in the statement because the Scheme had been "well signalled in the media". The Scheme was next debated in Parliament in March 2009, after the failure of Mascot Finance.

3.73
The Scheme was discussed in the Treasury's Briefing to the Incoming Minister of Finance in 2008, and the Secretary to the Treasury met with the Minister in early December 2008. After this meeting, the next Ministerial briefing was on 4 March 2009. Mascot Finance failed on 2 March 2009.

3.74
We consider that it would have been useful for the Treasury to have set up in late 2008 an appropriate system for formal and regular reporting about the Scheme to the Minister, to ensure that the Minister received all required information and understood clearly the risks the Scheme posed to the Crown. We did not see evidence of this happening, but we accept the Treasury's assurance that the Minister was kept well informed during this period.

Our views on the Treasury's implementation of the Scheme

3.75
The Treasury faced a challenging environment in the early period of the Scheme. Parliament had risen; there was a general election then new ministers and a new government. Work on a wholesale scheme was also under way, and there were lots of uncertainties in international financial markets.

3.76
In the early weeks of the Scheme, the Treasury faced significant pressure to provide policy advice and develop an implementation approach in an area where it had little experience. Many of the people we spoke with considered that the work the Treasury did to put the Scheme in place quickly was commendable and met the objective of assuring public and depositor confidence.

3.77
Very early in the Scheme, the Treasury identified several important operational aspects of the Scheme that it needed to address, including resourcing the claims process, monitoring requirements for successful applicants, and monitoring and reporting requirements for the Treasury. It also began to think about some important uncertainties ("what-if" analysis), including timing for the payout process and actions the Crown would need to take to recover any funds paid out under the Scheme.

3.78
However, there is very little evidence that these aspects were worked on until March 2009. Even then, much of the development appears to have been done "as needed".

3.79
It is generally acknowledged in private and public sector organisations that implementing any large and/or complex initiative is most effective when it is supported by formal planning. Formal planning helps clarify roles and responsibilities and allows for clearer objectives and goals against which to report performance. It also improves readiness for unexpected or unlikely events, such as the failure of a large financial institution, to ensure a quick and appropriate response.

3.80
In our view, the Treasury should have undertaken more formal and documented planning processes in October and November 2008. A formal planning framework would have ensured that each of the implementation processes and activities identified in the 13 October 2008 report to the Minister were developed and implemented. It would have contributed to ensuring that the monitoring requirements to be placed on successful applicants were developed and that the Reserve Bank's monitoring role was clear in the early days of the Scheme.

3.81
Planning would also have ensured that all key stakeholders within the Treasury were informed of developments at the right time. There is evidence from interviews that the communications team within the Treasury, for example, was sometimes not aware that decisions were being made that would need to be conveyed to the public.

3.82
Thorough planning would have set up payout processes well ahead of the failure of a financial institution guaranteed by the Scheme (at least the high-level processes, even if all the detail had yet to be determined). We heard often during our interviews that it was fortunate for the Treasury that the first financial institution to fail while in the Scheme was not a large finance company.

3.83
Effective planning is supported by strong governance processes for reporting and decision-making, including clear accountabilities. We did not find evidence of formal specific senior management oversight of the Treasury's work to implement the Scheme. We have not seen evidence that the Treasury worked through the monitoring and reporting requirements until March 2009, when the first round of information was received from the Reserve Bank and informal updates were initiated by the Treasury's operational team for the Scheme.

3.84
In our view, the Scheme's implementation would have benefited from a formal senior steering committee to provide strategic oversight.

3.85
We acknowledge that the first few weeks after the Scheme was introduced were hectic. However, the Treasury should have better documented its decisions and processes, and done so sooner, particularly after the first few weeks. The Treasury had a recognised "key person risk" in that two staff were critical to much of the Treasury's monitoring work. In instances like this, proper documentation is even more important.

3.86
The importance of complete and accurate documentation to formal planning is well established and particularly important for publicly accountable entities.

 

Recommendation 1
We recommend that the Treasury prepare a project planning framework to help the Treasury to implement large and complex initiatives. The framework should include an approach to crisis management planning and strong internal governance processes to ensure that appropriate senior managers are actively involved in the strategic direction of important aspects of policy implementation. These processes should include clear accountabilities, roles, and responsibilities for deciding and implementing policy.
Recommendation 2
We recommend that, for large and complex initiatives managed by the Treasury, the Treasury put in place a monitoring, escalation, and reporting framework that is agreed with the Minister of Finance and refined over time. This framework should require clear documentation of important implementation decisions and processes and provide for suitable formal reporting of results and emerging risks within the Treasury as well as to the Minister of Finance and other stakeholders.

3.87
The Treasury told us that it is now taking a more structured approach in its response to crisis situations (such as its work on government support for AMI Insurance Limited).


11: The Wholesale Guarantee Scheme was introduced to help financial institutions access funding from wholesale markets. This was also constructed as an opt-in scheme, with financial institutions able to choose to use the Wholesale Guarantee Scheme each time they issued securities. The Wholesale Guarantee Scheme was available to investment-grade financial institutions with substantial New Zealand borrowing and lending. In practice, it was used by the five largest banks. The fee charged was based on the credit rating of the financial institution and the term of the security issued. Deposit-taking financial institutions seeking to apply for the Wholesale Guarantee Scheme were expected to have also applied for a guarantee under the Retail Deposit Guarantee Scheme. Importantly, the Wholesale Guarantee Scheme required that financial institutions covered maintain a minimum level of capital. The Wholesale Guarantee Scheme ended on 30 April 2010. During its term, it guaranteed 24 security issues covering $10.3 billion of borrowing and made no payouts. It returned the Government almost $290 million in fees.

12: The deed for collective investment schemes followed in the next few days.

13: At that time, it was estimated that the Scheme would generate $238 million in fees during the two years. The Minister noted in the Cabinet paper that he had asked officials to review this estimate.

14: The contract also covered the Wholesale Guarantee Scheme, which the Reserve Bank was to monitor and report on, and approve individual applicants and pricing and fee structures.

15: There was a short comment in the Treasury’s briefing to the new Minister in 2008 raising the important need to consider an exit strategy for the Scheme (Briefing to the Incoming Minister of Finance: Economic and Fiscal Strategy – Responding to your Priorities). We did not see further consideration of this issue between that briefing and March 2009.

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