RBA Governor Sounds Warning Over Sovereign Bank Guarantee

Post by Sharat on July 29, 2009 · Under Australian Economy, Business News, International Business News, banking, interest rates · Comment

Governor of the Australian central bank, Glenn Stevens has sounded a warning for Australian financial institutions to start preparing for the eventuality that the Government would cease the sovereign guarantee scheme for wholesale funding, as global regulators in multiple jurisdictions worldwide lift the measure that was enacted to enable banks to obtain finance at the height of the credit crisis.

Speaking to a group of economists in Sydney Reserve Bank of Australia (RBA) Governor Glenn Stevens said both retail and investment banks had made heavy use of the guarantee scheme to raise international financing, but that global rivals had started to retreat from the policy.

Since the scheme came in to effect in October last year, Australian financial institutions have issued more than $100 billion in securities backed by the sovereign guarantee. The Big Four banking groups have been the largest issuers, and have access to the sovereign rating at a cheaper cost than their regional rivals.

National Australia Bank (NAB) was the first Australian financial issuer to raise debt on international markets without the use of a sovereign guarantee, raising £500 million in May. Since then the number of transactions announced without the guarantee has fallen.

“For their part, banks will need to reduce their reliance on the extended guarantees and stand on their own feet before too much longer. The banks of the US and Europe are starting down this path on their wholesale issuance, having recognised that it is in their own interests to do so. It would make sense for Australian banks, which have accounted for 10 per cent of global issuance of government-guaranteed bank debt over the past nine months, to step up their efforts to do likewise.” Mr. Stevens said.

Over the last few months nearly 90 per cent of all funding obtained by the Big Four Australian banks from both domestic and international credit markets, has been through the use of the guarantee.

The warning issued by Mr. Stevens follows testimony by RBA assistant governor Malcolm Edey to an Australian senate committee, that the guarantee may have produced a reduction in competition.

“There may well have been some consequences,” Dr Edey said.

Dr. Edey pointed out that bank customers have already begun to move their deposits to larger financial institutions, fearing that smaller regional banks are at risk of collapsing.

Dr. Edey however defended the policy which has been severely criticized by regional banks who feel that the Big Four banking groups have an unfair price advantage for use of the guarantee. Under the scheme, higher rated banks pay less for use of the guarantee than their lower rated rivals, and the Big Four banking groups are all rated AA.

“I understand the lower-rated banks are not happy about being charged a risk-based price. It is a deliberate feature of a design of the system that risk should be charged for,” he said.

Most market participants believe the guarantee will continue to be available for at least another year, though many expressed concern that Australia should not continue the policy once it has been lifted in other countries.

“It’s important to have some degree of co-ordination, but I wouldn’t say everyone has to do everything all at once. Some countries do have scope to go their own way.” Dr. Edey said.

Australian banking regulator the Australian Prudential Regulatory Authority (APRA) in its testimony to the same committee made the point however that the decision to end the scheme should be in tandem with a global effort.

“We would not want to see, for want of a better term, a cliff where today there is a guarantee and tomorrow there isn’t a guarantee,” APRA’s Keith Chapman said.

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