Reserve calls time on guarantee
By Clancy Yeates, Eric Johnston, and Peter Martin | smh.com.au | 29 July
Australia's banks are under mounting pressure from the Reserve Bank to wean themselves off a Government guarantee that has given them one of the cheapest funding sources in the world.
Amid concerns over how much power the big banks have amassed under the scheme, the Reserve Bank's governor, Glenn Stevens, said yesterday the time was approaching to wind back the guarantee of wholesale and deposit funds.
Mr Stevens said the measures, which have allowed banks to use the Government's AAA credit rating since October, were necessary in the "extreme uncertainty" at the height of the crisis.
But he said lenders would soon need to stand on their own feet. "I think it's going to soon be time for banks everywhere, including here, to borrow in their own right and get back to a world where private risk is appropriately priced and the governments are gradually able to draw back on that support," Mr Stevens said in Sydney. The scheme has no limit on the size of deposits or wholesale funds it guarantees, but charges banks for deposits over $1 million.
About $650 billion worth of deposits is protected, and the big four banks have raised more than $88 billion with the government sovereign rating.
In some more fragile economies such as US – where assistance is capped – banks have already started to curb their use of government guarantees.
"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. Failure to do so would threaten decades of regulatory reform through globalisation, he said, and could erode market judgment of risk.
A world of government-guaranteed debt could encourage some investors to be no more discerning than buyers of now-troubled collateralised debt obligations, he said.
At an earlier Senate inquiry, a deputy governor of the RBA Malcolm Edey described the financial strife that would have occurred without the guarantee, saying banks would have had "serious difficulty" raising funds. "Lending is still flowing, and that would not be the case if we had not had a guaranteed scheme that allowed the banks to continue to attract funding," Dr Edey said.
Critics of the guarantee say it has allowed banks too much power over small rivals, who are charged more for the protection. Big banks with ratings above AA- pay a 70 basis point fee for bonds issued under the scheme, whereas smaller banks pay 1 to 1.5 percentage points extra.
Dr Edey conceded the policy may have lessened competition, but its goal was to preserve the very life of the financial system.
"We shouldn't really think of the guarantee scheme of being an instrument of competition policy ... its primary purpose is that it's an exceptional measure to protect the system in a crisis."
The US, Britain will not guarantee debt after this year, but Australia's policy does not yet have an end date.
First published by Smh.com.au on July 29 2009
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