Treasury To Look At Ways Of Ending Federal Government Bank Guarantees

Post by Sharat on June 22, 2009 · Under Australian Economy, banking · Comment

The Federal Treasury Department is looking for ways to lift the Federal Government guarantee on bank deposits which has resulted in the Big Four banks to gain market share at the expense of smaller rivals and also led to mortgage funds freezing investor assets, threatening the income of retirees who depend on investment income to live.

The executive director of a mutual fund industry lobby Abacus, Louise Petschler, said that the government was acutely aware of the distortions that the guarantee has caused in the market and called on the government to lift the guarantee.

“Treasury is well aware of some unintended consequences of its guarantees on banks that flow from the financial crisis last year. We are urging them to wind back the wholesale guarantee for banks and find some other form of support to allow non-banks back into the lending market.”

Alternatives to the blanket deposit guarantee are policies implemented in Canada and the UK. The Canadian Government guarantee residential mortgage back securities, whilst the British Government allows smaller financial institutions access to cheaper funding.

“Canada has five big banks, and yet more competition than here because of the government’s backing of RMBS securities,” Ms Petschler said.

Another proposal being bandied about is a multi billion dollar index linked Federal Government bond issue which could be accessed by the property sector.

Fund managers, building societies and regional lenders have asked the Government to review its wholesale funding guarantee policy as soon as next month. The policy which was in response to global credit markets freezing in October, after the collapse of Lehman Brothers.

The guarantee provides the Big Four lenders an 80 basis point advantage in funding over regional lenders, building societies and credit unions.

Lindsay Tanner, the Finance Minister conceded the point that wholesale funding guarantees no longer appear to be necessary, but said unless there was multilateral action globally, lifting of the guarantee would be difficult because it would make Australian issuers less attractive to global investors.

Both ANZ chief executive Mike Smith and CBA chief Ralph Norris have called for an end to the guarantee.

The Big Four lenders want to end a government fee charged for insuring deposits of over $1 million, whilst the wholesale funding guarantee has raised the Government more $1 billion in revenue.

Bank critics said yesterday that if the government were to drop guarantees, it should do so across the board, in retail funds as well as wholesale funds.

The Federal Treasurer Wayne Swan had previously said in a television interview, that lifting of the guarantee would be an “act of madness”.

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