The Government could be pushed to extend its bank deposit scheme to cover interbank lending, something the Australian Government has already done and something the business sector is calling for.
National Party leader John Key took the initiative yesterday, saying National was prepared to work with the Government on any "sensible measure" to protect New Zealand's banking and financial system against the impact of the current international credit problems.
"To the extent that these measures require further Crown guarantees, we are prepared to support them in a bi-partisan way.
"If the Government accepts the need to find some form of agreement with the Australian Government about the framework for moving forward, then my colleagues and I will actively support that process," he said.
An extension of the bank deposit guarantee scheme could come as soon as today, with Finance Minister Michael Cullen considering advice about matching the Australian scheme.
Mr Key speculated that further details of the Australian scheme would be made early this week, providing a clearer backdrop for decisions to be made in New Zealand.
Prime Minister Helen Clark and Dr Cullen announced a week ago the scheme which guaranteed cover for all retail deposits of participating New Zealand registered banks and retail deposits by locals in non-bank deposit-taking entities.
These include building societies, credit unions and deposit-taking finance companies.
Deposits total about $150 billion.
Interbank deposits could add another $450 billion in Crown guarantees.
The Government was criticised all last week for not following the lead of Australian Prime Minister Kevin Rudd in also guaranteeing wholesale funding to banks in an attempt to combat the effects of the global crisis.
Dr Cullen said yesterday he was receiving advice on the possible outline of a wholesale scheme.
"We've been working on that for quite a long time but matters had to get accelerated very suddenly because of events last week."
Any decision on the wholesale scheme would be delayed until the final make-up of the scheme was considered.
However, the Government could not leave the New Zealand banking system exposed to a position where there was a risk that money would all go to other financial systems because they had such guarantees.
"Most of the rest of the world is still struggling with what to do in this area.
''Some have moved into wholesale guarantees; some have not as yet."
Mr Key stressed that New Zealand banks were strong but in the current international environment, without a government guarantee it would be difficult for them to raise funds in offshore finance markets where they would have to compete against banks with cast-iron government backing.
In a time of uncertainty, wholesale funds would flow to safe havens.
That also applied to wholesale funds within New Zealand.
There was a risk that local financial institutions would decide to shift some wholesale deposits out of New Zealand banks and place them in Australian banks where their deposits would be guaranteed.
"All this means that banks would, over time, have less money to lend to New Zealand businesses and New Zealand households and that lending would become more expensive," he said.
Dr Cullen welcomed Mr Key's pledge of bipartisan support.
He was to give National Party finance spokesman Bill English the latest joint Reserve Bank and Treasury papers on issues around finance sector regulation.
"I will take full notice of any comments that Bill English may have and I will ensure that he continues to be kept informed of any developments as they occur," Dr Cullen said.
