The government’s wholesale funding guarantee scheme released over the weekend is more expensive than the version across the Tasman, although similar in price to those in Canada and the UK.

The Crown has sought to design the guarantee so that banks will not use it unless required, and will stop using it as soon as possible.

This has been done through hefty fees, which vary based on the riskiness of the issuer and the term of the security being guaranteed.

The fees range from an 85 basis point charge on debt with a term of less than a year issued by a bank rated AA- or above; to a 250 basis point charge on a BBB- to BBB+ rated institution issuing debt with a term of more than a year.

“The fee schedule has been designed to ensure that the facility is used while it is needed, but to encourage issuers to graduate from using the guarantee as market conditions permit,” says a statement from Treasury.

“These prices have been set informed by data on the gap between government and private sector borrowing costs in normal times and over the crisis period.”

The Australian wholesale guarantee, released on October 12, does not include differentiated pricing based on the term of the security.

All debt issues of up to five years covered by the facility will attract a fee of 70 basis points for AA rated; 100 basis points for A rated; and 150 basis points for BBB and unrated institutions.

It’s possible that the New Zealand fees may increase further, with the Crown retaining the power to up its charges in order to encourage issuers to seek debt that doesn’t need to be covered by the guarantee.

“As market conditions normalise and unguaranteed funds can be raised more readily, at some point it will be cheaper for institutions to issue unguaranteed paper rather than guaranteed paper. Should we judge that that migration was not occurring sufficiently rapidly, in light of our reading of market access conditions, we would have the option to increase the price of the facility,” the Treasury statement said.

Bank heads have differed on their view of how important the guarantee will be.

ANZ National chief executive Graham Hodges said, at the bank’s results announcement on October 23, that there was no need to rush into implementing a guarantee and “No one really wants this impediment in the market place."

But last week Westpac acting chief executive Bruce McLachlan said a wholesale guarantee was more important than the retail guarantee announced earlier this month.

“As banks in New Zealand we’re competing for funding in the international marketplace, up against banks all over world that have guarantees.

“Without them it will be very difficult for New Zealand banks to source the funding needed to support the economy,” he said.

The wholesale guarantee facility will be available to financial institutions that have an investment grade credit rating (BBB- or better), and the Crown has followed other countries in limiting the scheme to financial issuers rather than including corporate and local government entities too.

New Zealand dollar issuance has been included, despite the scheme being implemented to re-establish access to foreign (rather than domestic) funding markets, in a bid to ensure that funds are not lost from locally incorporated banks – like Kiwibank – to the local branches of Australian banks, which are covered by that country’s wholesale guarantee.

“Including domestic issuance should enable managed funds and other similar entities, over time, to transfer most of their claims on New Zealand registered banks into instruments that are eligible for coverage under a wholesale scheme,” Treasury said.

Unlike the retail deposit guarantee scheme, which has a fixed term of two years, the wholesale guarantee covers any paper issued under the scheme up to maturity, or for five years.

There is no limit on the amount of wholesale paper the guarantee will cover, but each institution can only increase its total eligible debt by 25% from its level prior to the credit crisis, and still have this debt covered by the scheme.

“This limit provides the Crown some additional cover against the risk of banks seeking to increase their funding activities solely on the basis of the guarantee,” the Treasury said.

“It also provides a cap on the risk that New Zealand dollar issuance undertaken by New Zealand branches of wholesale banks under this guarantee would be used to fund the wider activities of the group."

The Crown has power to veto a guarantee of any issuer or debt issue, even if it meets the criteria.

Click here for full details of the scheme.