Big Banks Want to Hold on to Big Depositors

Post by NeilMc on November 14, 2008 · Under banking, news · Comment

The Major Australian Banks, intend to launch a range of guaranteed accounts in defense of their swollen deposits collected under the Federal Government support scheme. Australia’s big four lenders particularly Commonwealth Bank of Australia, face big outflows of deposits, once the three year guarantee scheme takes effect at the end of November.

Australian Banks have come to rely on deposit based funding over the last few months and are no doubt very reluctant to let such a stable source of funding disappear or move to a rival. Any outflow would threaten the funding positions of big banks. The importance of deposit based funding has increased as conditions in wholesale international money markets tighten.

Under the Government’s deposit scheme, only the first A$1 million of a customer’s money with an institution will be guaranteed free. Beyond that, customers are required to pay some kind of insurance premium or fee. In order avoid such fees, if a customer with A$10 million were to deposits that money across 10 institutions equally then under existing guidelines all of those deposits will secure free protection.

The prospect of wealthy depositors diversifying their money across the banking system has led to smaller institutions taking market-leading positions in the term deposit market. In order to counter this potential massive outflow of deposits, Commonwealth Bank said it was looking to introduce special guarantee style accounts.

Such accounts would be priced at a discount rate or include a special fee to cover the costs of guaranteeing deposits of more than $1 million. Smaller lenders such as Bank of Queensland, Elders Rural Bank and Bankwest are making an aggressive pitch for customers with more than a $1 million ready to deposit.

Banks are likely to continue reducing their deposit rates as credit conditions eased in domestic and offshore money markets. Short-term money market rates eased up in October, but the major banks say they are continuing to encounter difficulty raising funds for terms beyond 12 months. Uncertainty in long-term money markets had prevented banks passing on the full benefit of last week’s official rate cut.

Some analysts say that there is an awful lot of uncertainty present, despite the cost of funding in some markets having actually fallen. If there is another full month of relative stability, then it is felt that banks will pass on a little more of the rate cut.

National Australia Bank’s Ahmed Fahour said no local banks had been able to secure medium-term funding in the last month, he said “In the wholesale market people only want to lend money for a month,”

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