CBA Chief Adds Voice To Call For Government To End Sovereign Funding Guarantee

Post by Sharat on June 8, 2009 · Under Australian Economy, Business News, banking · Comment

Another chief executive of a Big Four Australian bank has added his voice to ANZ Chief Mike Smith’s call for the sovereign guarantee on funding to be lifted and also called for a coordinated global effort to end the measure worldwide. CBA chief Ralph Norris joined his ANZ counterpart in suggesting that the guarantee on wholesale bank funding be removed.

CBA’s Norris said the global financial markets had sufficiently stabilized, that the Federal Government now had the ability to begin planning a transition process for the lifting of the stabilizing measure.

Mr. Norris agreed with ANZ’s Mike Smith that Australia on unilaterally ending the guarantee would not be effective and may even counter-productive towards its own domestic banking industry and a global strategy would need to be formulated, perhaps at the G20 level.

“If the G20 took the guarantee away, you’d find investors accepting it very quickly because, effectively, the G20 would be saying the financial system has stabilised,” Mr. Norris said in an interview with The Australian.

“We could borrow money offshore now without the guarantee because there’s plenty of liquidity out there, but the problem is it’s very expensive.”

The Federal Government is likely to ignore the calls made by both ANZ and CBA chiefs. Lindsay Tanner the Finance Minister has rejected the claim made by Mike Smith early last week that the guarantee was distorting the market. Mr. Tanner had said that the Government had no intention of ending the guarantee, but did say that the use of the guarantee to obtain funding would fall.

“At a point, (the guarantee) will no longer be necessary,” Mr. Tanner said on ABC last week.

A spokesman for Prime Minister Wayne Swan echoed Mr. Tanner’s comments on Friday, whilst a senior Treasury official told the Senate economics committee that the guarantee had been very successful.

Last October, when the global financial system teetered on the brink of collapse in the wake of a bailout of US insurer AIG and outright collapse of US investment bank Lehman Brothers, the Federal Government introduced a Sovereign guarantee on wholesale funding.

Australian banks have been able to essentially rent the triple A sovereign rating of the Commonwealth of Australia, with the AA rated big four banks paying about 70 basis points rising to 150 basis points for BBB rated regional banks.

Domestic banks have raised $104 billion in Sovereign guaranteed debt on international credit markets, which has the effect of creating $1 billion in annual revenue for the Government.

Regional banks do not share the same view as their larger rivals and have cautioned the Government against moving too quickly. Bank of Queensland chief David Liddy has repeatedly made comments that it was still too early for the Government to end the measure.

“The risk appetite is starting to return, but my gut feel is it’s too early to remove the guarantee. I’d like to see it kept in place but with parity introduced in the fee structure, because at the moment we have to pay a premium to investors on top of the higher fee for the guarantee. The Government has to ensure we have competition, because we won’t have competition with only four big banks.” Mr. Liddy said.

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