Federal Wholesale Funding Guarantee To End

Post by Sharat on February 8, 2010 · Under Australian Economy, Business News, banking · Comment

The Australian federal government is ending its policy of guaranteeing the wholesale funding commitments of Australian banks, citing a stronger economy and improving market conditions as reasons for ending the scheme, which it says will not contribute to a rise in funding costs.

Australian lenders raised approximately $160 billion through the use of the federal guarantee, which was introduced at the height of the global financial crisis during October 2008, immediately after Lehman Brothers collapsed.

Australian banks will no longer be able to raise financing through the use of the guarantee from March 31st, a month after the British government ended its guarantee, and nearly six months after the US government ceased to offer government guarantees on funding commitments for American banks.

Federal treasurer Wayne Swan cited improved conditions in financial markets and a stronger economy as reasons why Australian lenders no longer required assistance with their fund raising exercises.

The last Australian bank to make use of the guarantee was Westpac, who used it to raise $9 billion in December last year.

The government’s guarantee of retail deposits up to $1 million will continue until October next year.

Mr. Swan said that the federal guarantee was necessary to protect the Australian financial system from the worst of the financial crisis, but global financial regulators have said that such guarantees are no longer needed because lenders had open access to international funding markets.

“Our regulators explicitly advise that removing the guarantee will not materially affect banking sector funding costs, I think we’ve seen from the data that’s been published that their (banks’) interest rate margins are back to pre-crisis levels. That means they are as profitable in terms of their rate margins now as they were prior to the onset of the global financial crisis. So therefore there is no justification to use this decision for them to say that it would have impact on their borrowing costs.” Mr. Swan said.

A CBA spokesperson said that the lender was little surprised by the decision:”We have not used the government guarantee for some months and don’t envisage any problems in meeting our future funding requirements.”

Some major lenders however re-iterated the stance they have had over much of the last two years, saying that funding costs continued to remain high, despite an easing in the broader financial market.

Westpac chief executive Gail Kelly told The Australian at the World Economic Forum that “raising money has become a whole lot more expensive”.

However the government was criticized for failing to consult with smaller regional lenders, and drew a sharp rebuke from Bank of Queensland (BoQ) chief executive David Liddy.

Mr. Liddy, who also acts as vice-chair of the Australian Bankers Association (ABA), said that BoQ would continue to have to pay higher access fees on an estimated $1 billion in existing debt, which was raised through the use of the guarantee for up to five years.

“BoQ is now penalised for the next five years to the tune of 80 basis points and that does not help competition,” he said.

“There may well have been consultation with the major banks but there sure as hell hasn’t been consultation with the regional banks, certainly not the Bank of Queensland. An orderly withdrawal makes sense but I’m not sure we are having an orderly withdrawal.”

Mr Liddy said the bank would be willing to revisit its variable mortgage rates if a uniform access fee was introduced for the life of the residual paper issued under the scheme.

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