It also struck the right balance for taxpayers.
The current scheme runs until October 12, 2010. The new scheme will start on October 13.
"Crown retail guarantees have helped maintain confidence in New Zealand's financial institutions. However, they also distort the market and impose costs.
"The planned extension will help maintain confidence in New Zealand's financial institutions while achieving an orderly exit from the scheme."
The deposit guarantee scheme was put in place last year to give New Zealand depositors confidence that their money would be secure in the event of an approved financial institution failing.
Mr English said the transition would run alongside the Reserve Bank's new regulatory regime for non-bank financial institutions, which requires all finance companies with more than $20 million in assets to get credit ratings.
The changes and the notice given would allow for an orderly transition.
"Some institutions may choose not to apply for the extended scheme and some won't meet the application criteria.
"Whether or not they are covered beyond that date will depend upon whether their institution joins the new scheme. Participation in the new scheme will be voluntary."
Mr English said the Government had paid out $68 million to cover guaranteed deposits, but did not say how much money had been raised from the fees charged to banks.
The changes would be legislated for and Mr English did not envisage any extension past the end of 2011.
The announcements yesterday largely aligned New Zealand policy with that of Australia, Mr English said.
