The Treasury knew South Canterbury Finance was in trouble but extended a Crown guarantee anyway, a court has been told.
Former South Canterbury Finance directors Lachie McLeod, Edward Sullivan and Robert White are defending 18 fraud charges brought by the Serious Fraud Office at the High Court in Timaru.
The charges follow the 2010 collapse of South Canterbury Finance, which cost the taxpayer $1.7 billion because it was covered by the scheme.
The company had been accepted into the Labour Government's Retail Deposit Guarantee Scheme during the 2008 global financial crisis with approval from the Treasury and the Reserve Bank. The Crown says it was included on false pretences.
South Canterbury Finance's struggles became apparent in November 2010 when it applied for a two-year extension to the guarantee.
John Park, director of the Treasury, told defence lawyer Marc Corlett on Wednesday that the extension was approved despite obvious signs coming from the company.
"Am I right that by that stage, Treasury's assessment was that it was more likely than not that South Canterbury Finance would fail?" Mr Corlett asked. Mr Park replied: "Yes".
Mr Park said an extension was granted because excluding the company would have resulted in its immediate failure, leading to investors in other companies pulling their money out.
The Treasury was pressed on how readily financial institutions were allowed into the Crown's Retail Deposit Guarantee Scheme in 2008.
John Park told the court that, in the midst of the crisis, companies were let into the scheme to maintain public confidence in financial institutions, but had to meet other considerations.
"No applicant was refused in the first few months of the scheme for failing to meet any of the other factors which included credit worthiness and sound business practice."
Mr Park said he couldn't remember if he had ever declined a financial institution from entering the scheme.
Lawyers defending the accused questioned whether the Treasury was in full support of the retail deposit scheme.
Under cross-examination, Mr Park said when it was first introduced, the position of the Treasury and the Reserve Bank was that it was not needed. But, he said, this was cautious and hedged advice.