Australian Banks Continue to Claim Deposit Guarantee Distorting Market

Post by Sharat on December 8, 2008 · Under Featured Articles, banking, interest rates · Comment

The Federal Government’s decision to blanket guarantee all retail bank deposits of under A$ 1 million continues to distort the landscape, with domestic banks claiming interest rates on deposits are now artificially inflated as a result.

The October 12th Federal Government measure to offer free insurance on deposits of less than A$ 1 million, designed largely to soothe an increasingly panicked retail and institutional customer base, has had the perverse effect of making it harder for banks to pass on the full effect of cuts in official lending rates to their customers, and increasing banks funding costs.

NAB chief executive John Stewart said that the guarantee had the effect of pitting banks’ against each other in the battle for retail deposits and banks were bidding against one another pushing the price of that kind of funding higher. “If you were to say we could get wholesale funds cheaper, then deposit rates would come down and we’d be better able to pass on cuts,” Mr. Stewart said.

Westpac’s Peter Hanlon said “You’d have expected the cost of deposits to fall because there’s zero risk, but because all banks are guaranteed, there’s no value placed against risk management, so deposit rates are at artificially high levels.”

The effects can be seen with online products. Westpac and NAB currently offer 5.75 per cent and 5.25 per cent introductory rates, respectively, for those who sign up to their esaver and iSaver accounts. CBA and ANZ offer 5per cent on their Netbank and Online Saving accounts.

Ludicrous and Self Serving

An executive with an international bank with a presence in Australia has labelled such claims by the domestic banking lobby which comprises and advocates for and behalf of mainly the big four Australian banks as “ludicrous and self serving”.

In an earlier report an unnamed source said that the big four were basically displeased with the fact that the guarantee has levelled the playing field amongst all financial institutions in the Australian banking landscape.

The big four have cultivated a AA risk rating and prior to the credit crisis, and the perception was that of all the Australian banks, they were the most strong and stable. The Federal deposit guarantee has eliminated any benefit that the big four could obtain in terms of funding costs from such a perception, and hence their angst. This displeasure with the level playing field is what the bank executive said is driving the industry to lobby for an end to the deposit guarantee.

NAB’s John Stewart said the trigger for a decline in high deposit rates was likely to come from banks starting to use the wholesale funding guarantee to raise term debt. Term debt markets have been prohibitively expensive as a result of the dislocation caused by the global financial crisis.

Global banks, however, have started issuing sovereign-guaranteed debt, with the guarantee becoming effective in Australia late last month with NAB being the first Australian bank to do so.

“I think if the wholesale guarantee starts working, (deposits) will be less important,”Mr. Stewart said. He also added the Government should begin planning the unwinding of the deposit guarantee scheme and at the very least should not extend the measure beyond the current 3 year expiry date.

Compare Australian Savings Accounts