It is a good time to review the deposit guarantee scheme in light of the collapse of Mascot Finance, Reserve Bank Governor Alan Bollard said today.
On Monday Mascot became the first finance company to collapse while covered by the scheme.
Receivers have yet to determine to what extent the Government will be called upon to repay $70 million owed to debenture holders.
Finance Minister Bill English expected the bill would be greater than $10m.
Prime Minister John Key and Mr English said the company should not have been in the scheme.
"In hindsight it was probably wrong," Mr Key said.
Mr English had asked Treasury to report to him.
Dr Bollard was questioned about the guarantee scheme at a meeting of Parliament's finance select committee today.
He said the scheme was designed at very short notice in crisis mode with the intention of ensuring confidence in the financial sector and preventing a rush of money across the Tasman as it moved to implement a similar scheme.
Considering this it was well designed, Dr Bollard said.
There were clear criteria, but the way the law was designed the trustees of financial institutions such as Mascot held the primary responsibility for ensuring their health.
The scheme had worked as it was designed to and it had met its wider objective of ensuring confidence in the finance sector.
It could be reviewed or redesigned, Dr Bollard said.
When it applied for coverage, Mascot, which was active in the rapidly deteriorating property market, had already ceased raising money via debentures and was "reviewing" its future in the finance industry.
Treasury did not know until last week of Mascot's problems.
Mr English said institutions were meant to be viable when they gained the guarantee.
"In this case Mascot have gone into receivership so we need to learn from this example how to make sure that we minimise the risks to the taxpayer that institutions that come along looking for the guarantee in the future may not be viable."
Those in the scheme would continue to be covered.
