New Zealand finance companies and risk premiums

Authors


  • The comments of participants at the 2013 New Zealand Finance Colloquium, Yvonne Deneys of the Reserve Bank of New Zealand, Steve Swidler, the anonymous referees and Henk Berkman (the editor) are gratefully appreciated.

Abstract

This article uses the recent implosion of the finance company sector in New Zealand to examine a number of questions. In the period between the upsurge in the default rate in 2006 and the implementation of a Government Guarantee Scheme in October 2008, we find that the debt risk premiums within the deposit rates of these institutions were grossly inadequate to compensate for default risk, that depositors continued to make significant new deposits even into firms that failed shortly afterwards and that the failure of the companies to increase the risk premiums was likely out of concern that this would aggravate perceptions of default risk.

Ancillary