English backs Treasury over guarantee scheme criticism

Finance Minister Bill English has defended Treasury against criticism it missed early risk warnings about the retail deposit guarantee scheme.

The criticism came with the Auditor General’s report, released yesterday, on Treasury’s management of the scheme, finding Treasury didn’t do enough to protect taxpayers from those risks and costs to the Crown.

Nine finance companies in the scheme failed, causing the Crown to pay out $2 billion to depositors – most of them South Canterbury Finance investors.

The Government can expect to recover about $900 million of that amount.

Mr English told Radio New Zealand's Morning Report criticism of Treasury was not particularly justified under the hasty circumstances the scheme was prepared in the peak of the 2008 global financial crisis.

“The practicalities of getting the scheme into place were very, very demanding. It had to be done over a very short period of time and I don’t think anyone would regard it as ideal.”

If he wanted to make a political point, he would say not a very good job had been done to establish the guarantee scheme, he said.

“But in fact, the previous government didn’t have much choice. It had to do it in a hurry and its not surprising it didn’t get everything right and nor is it surprising Treasury wasn’t geared up straight away for it.”

Auditor General Lyn Provost’s report said the scheme had succeeded in maintaining confidence in the financial system, but the costs had been significant.

“Overall, the scheme achieved its goal. No banks in New Zealand failed and there was no run on banks. Many of the other finance institutions also survived the global financial crisis. The economy was stabilised,” the report said.

But Treasury had failed to protect taxpayers from the “significant risks” of including finance companies in the scheme, which let their borrowings blow out by almost 1000%.

Stronger governance and reporting frameworks for the scheme should have been in place, the report found.

Mr English said in creating the scheme, Treasury was dealing with a very large number of entities that knew nothing about coming into the scheme and had to set up the operation to get them in.

“It may not have paid quite as much attention to the governance, but I’d have to say at the time the urgency of meeting the undertakings given to depositors was probably a higher priority.

“ I think anyone looking at it afterwards would have structured it differently. No one in New Zealand really knew how to do it."

When it entered the scheme, South Canterbury Finance was regarded as a viable, successful institution, said Mr English.

“It took some time for the complexity of that company to become apparent. The challenge of finding out what was really happening there was really quite considerable.”