ANZ Chief Endorses Government Decision To Axe Sovereign Guarantee

Post by NeilMc on February 10, 2010 · Under Australian Economy, Business News, Capital Markets, Company News, banking, interest rates, mortgages · Comment

Mike Smith, chief executive of Australian banking major ANZ, says he supports the decision by the government to end the sovereign guarantee on bank wholesale funding, but added a note of caution, saying that the Australian banking system continues to be vulnerable to potential damaging “aftershocks”.

Smaller regional lenders have criticized the federal government’s decision to end the sovereign guarantee on wholesale funding by March 31st as being unfair, and have warned that the move would increase the level of pressure they face.

Mr. Smith became the first chief executive of an Australian retail bank to publicly endorse the move, but it is widely expected that others will follow suit.

Despite axing the sovereign guarantee, the federal government deposit guarantee on retail deposits of up to $1 million will remain effective at least until October 2011.

In an interview with The Australian, Mr. Smith who was largely supportive of government policy in response to the global financial crisis, said that conditions in financial markets had sufficiently eased for the government to end its guarantee.

“Right now, the government’s decision is the right one. Our commercial challenge this year ahead is going to be managing volatility in markets as we see aftershocks from the GFC work through the system,” he said. “The current concerns about sovereign debt in Europe are an example, but the major Australian banks are now among the strongest in the world and we’re well placed to manage through this.” Mr. Smith told The Australian

The general trend since mid 2009 amongst Australian issuers has been to opt against using the guarantee for their funding, preferring instead to issue debt not guaranteed by the federal government, and therefore avoid paying a 70 basis point fee to the government for its use.

“And of course, at the moment there is still a fair amount of appetite for Australian risk — both guaranteed and un-guaranteed,” Mr. Smith said.

The federal government’s decision to axe the sovereign guarantee is expected to intensify competition in the market for retail deposits, as major banks battle for larger market share, and shift away from the use of international wholesale markets to fund their mortgage books.

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