The wholesale funding guarantee offered to banks is being wound up but the much larger retail guarantee is still expected to stay in place until the end of 2011 and pay out $771 million.
The guarantees were set up in November 2008 when the liquidity crisis had hit global markets and there were fears that banks here would not be able to raise funds as spooked investors moved to guaranteed markets and local depositors would take money out of banks as financial institutions around the world fell over.
Finance Minister Bill English said banks no longer needed or used the guarantee to raise funds overseas and the move would match the conditions set in Australia.
"It helped our banks access funding during that crisis, but international market conditions have improved -- and continue to improve in 2010. New Zealand banks are now raising funds without using the guarantee, which was always envisaged as a temporary measure for extraordinary times," Mr English said.
His announcement follows confirmation last month that the Australian wholesale funding guarantee will end on March 31. Other countries have also ended their guarantee schemes or are in the process of doing so.
Since the wholesale guarantee was set up, 24 guarantee certificates have been issued, covering $10.3 billion of borrowing by banks. The scheme has made no payouts and the Government will receive almost $290 million in fees.
The wholesale guarantee facility is separate from the retail deposit guarantee scheme. No changes were planned for the retail deposit scheme beyond those announced last year, which take effect from October 13, Mr English's office said.
There is currently $133 billion in retail deposits under guarantee covering 73 institutions but it is not known how the changes will impact on that number or financial institutions.
It expected that many banks will not want the guarantee as they do not need it to convince depositors their money is safe and the fees charged are adding cost to their business.
At the other end of the financial services scale non-bank depositors have to get a credit rating of BB or higher to be eligible and even if they qualify face very high charges from the Government for the guarantee.
Some smaller finance companies have already got out of the lending business saying they will not be able to meet the requirements and will not be able to function unless they offer a guarantee.
Treasury had no forecasts on how many companies would continue to take up the offer of a guarantee or the amount that might have to be covered.
While no money had been paid out by the Government on the wholesale side, a number of smaller companies did call on the retail guarantee.
Currently Treasury is budgeting a net loss in default payments of $771 million.