We now have insurance based on risk!!

Thanks goodness – they have changed the deposit insurance scheme such that the premium depends on risk!!!!

We have discussed that here (*, *, *, *).

Also they have capped the amount you can insure at $1m – very good.

The one concern left is the wholesale market. With no wholesale insurance available the wholesale market for funds is threatening to dry up. With many other countries doing it we have a problem – because of other nations choice to insurance wholesalers domestic credit for banks could dry up.

However, I would like to point out that there is unlikely to be a “bank run” on wholesalers, and as a result if they were willing to pay market rates for private insurance I’m sure they could get it – as a result in of itself government wholesale insurance is not a good idea. As a result, the only reason for doing it would stem from this “international prisoner’s dilemma” – something the Bank must not see as a sufficient threat.

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  • You saw the Minneapolis Fed piece suggesting that there hasn’t really been any drop in interbank lending? Mulligan discusses….

  • “You saw the Minneapolis Fed piece suggesting that there hasn’t really been any drop in interbank lending?”

    I’ve seen that it is there – I have not read it yet though. I will do that soon.

    I have seen Klings piece – I have post on that out later.

  • Matt,

    I agree. Finally some connection between risk and price.
    I think the wholesale might be solved for us by the Australians pulling back from their blanket guarantee. I haven’t had a good look around this morning, but I think this NZ$1 mln cap might be it because the Australians are likely to adopt the same and drop the full wholesale guarantee.
    Just a feeling, but I hope so…the broad wholesale guarantee is just too much and will kill the CP market dead

    cheers
    Bernard

  • “I haven’t had a good look around this morning, but I think this NZ$1 mln cap might be it because the Australians are likely to adopt the same and drop the full wholesale guarantee.”

    That would be very interesting – guess we will see soon

  • gomang

    “As there are a large number of applications”

    Who’s left to apply – I would guess a few building societies, SCF maybe but cant think of anyone else who deserves to get into the scheme. As a taxpayer, I’ll be heartily p’ed off if any anyone associated with a failed finance company manages to reflate their business (and personal wealth) by getting into the scheme. 300 bps for a non rated company is a joke – the premium should at least get close to their alternative cost of funds which must be 800 bps or more.

  • “300 bps for a non rated company is a joke – the premium should at least get close to their alternative cost of funds which must be 800 bps or more”

    True, the current rate may not accurately reflect risk. However, it is an improvement on what we had before 😛

  • “Minneapolis Fed piece”

    I’ve read the “research”. It is just a bunch of graphs of current volume and interest rate data with only about 5 years historical context.

    I think they concluded a bit much about what will happen to credit markets given the graphs they provided – it was definitely not research in any (reasonable) sense of the word.

    It is disappointing, because it is an important issue – however, I don’t think we’ll be able to see the credit crisis in the numbers until we’ve had it. The change in interest rate spreads is the only truly timely and contemporaneous indicator we have for the change in credit conditions 🙁

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