Magazine article New Zealand Management

FINANCE : Another DFC! - Do We Really Need One? the Development Finance Corporation Collapsed 20 Years Ago Last October. at the Time, Sandy Maier Was Chief Executive of Citibank, but Then Was Appointed the DFCa[euro][TM]s Statutory Manager and Led the Restructuring. He Reflects on This Episode in New Zealanda[euro][TM]s Banking History and Considers the Validity of Calls to Set Up Another DFC

Magazine article New Zealand Management

FINANCE : Another DFC! - Do We Really Need One? the Development Finance Corporation Collapsed 20 Years Ago Last October. at the Time, Sandy Maier Was Chief Executive of Citibank, but Then Was Appointed the DFCa[euro][TM]s Statutory Manager and Led the Restructuring. He Reflects on This Episode in New Zealanda[euro][TM]s Banking History and Considers the Validity of Calls to Set Up Another DFC

Article excerpt

Byline: Sandy Maier

The continuing impacts of the Global Financial Crisis on the New Zealand banking system and the collapse of dozens of finance companies are still fresh in our minds. Some experts, therefore, wonder how growing companies will find enough credit to continue operating without a modern-day equivalent of the Development Finance Corporation. Leta[euro]s consider that.

A On October 2 1989 the Reserve Bank of New Zealand decided that the financial state of the DFC had deteriorated to the point that it had become a problem of systemic importance to our financial sector that required the imposition of statutory management. The reverberations of the decision spread quickly through local and global markets and created headlines in the financial press that would continue for a long time.A

The decisions taken that day and throughout the subsequent restructuring impacted on the finance sector for years. The DFCa[euro]s collapse influenced the financial mechanisms used a few months later to assist the BNZ through a series of similar troubles; affected the regime still used today to supervise our largely Australian-owned banking sector; and impacts the discussion around salvaging todaya[euro]s finance company wrecks.

On October 1 last year, accounting firm PricewaterhouseCoopers and lawyers Bell Gully hosted a panel discussion to look back and put the events of 20 years earlier in perspective. Both firms had, in earlier incarnations, been deeply involved in the restructuring of the DFC.

Panellists included David Caygill, the then Minister of Finance; Don Brash, Governor of the Reserve Bank throughout all the years of the statutory management; Fran Oa[euro]Sullivan, the journalist most closely identified, both locally and internationally, with the breaking story and its subsequent media coverage; and John Waller, the last of the DFC statutory managers.

The audience included key representatives from the Reserve Bank, commercial banks, former DFC directors and executives, lending and treasury staff, the National Provident Fund (the majority owner at the time of the failure), lawyers, accountants and other professional advisors, Treasury, the Securities Commission, and other Crown entities. It was an unparalleled opportunity to examine what actually happened and assess the continuing impact of the event.

One of the persistent issues that arises out ofA the experience is the continuing claim that the financial sector needs another DFC. The reasons usually advanced include: filling a development finance role that is not fully served by current market players; supporting key sectors of a growth economy; and, to better achieve a range of policy objectives. The issue hung over the room in October, and provoked considerable commentary and debate. We were even assured that there are a[euro]livea[euro] discussions within Government to examine the case for a a[euro]second DFCa[euro].

Several participants raised practical issues:A

a[euro]cents The decade of the 1980s was a time when rules governing capital adequacy were in their infancy. It would be much more difficult today to assemble sufficient capital to successfully operate an entity of the size and scope required to fill an analogous place in our current economy.

A a[euro]cents Funding, then and now, would largely have to come from overseas wholesale markets. There exists considerable doubt that counterparties could be found in todaya[euro]s highly competitive global market to provide sufficient liquidity to fund a new entity, at least without extensive and continuing government support. …

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