Australian government guarantees deposits and banks' wholesale funding
The Australian government announced on the weekend that, with immediate effect, the government will guarantee all
deposits with banks and other deposit taking institutions. The Government also will guarantee wholesale term funding by
Australian financial institutions. As such, the Government effectively is guaranteeing the liabilities of Australian
financial institutions. At the same time, the Government announced that it plans to double to A$8 billion the amount of
public funds made available to purchase newly-issued residential mortgage backed securities (RMBS), a measure designed
principally to underpin competition in the banking sector by assisting non-bank institutions to raise term funding.
Some details of the measures remain a little sketchy, but should become clearer in coming days. As they stand, though,
the measures, which are similar to those adopted in several other countries, including New Zealand, should help to
restore confidence in the Australian banking system. The RBA's recent Financial Stability Review indicated that
Australia's banks are secure and well-capitalized. The global credit crisis, though, has significantly raised funding
costs for local financial institutions, caused the non-bank segment of the residential mortgage market to all but
disappear, and has undermined confidence in Australian banks.
The measures announced yesterday were:
• The Government's deposit guarantee applies to both retail and wholesale deposits with all Australian banks, building
societies and credit unions, and to Australian subsidiaries of foreign-owned banks. The guarantee will be in place for
three years, after which the measure will be reviewed. There is no cap on the size of the guarantee - previously, the
Government had been talking about limiting the guarantee to A$20,000 per deposit. It applies to deposits in Australia in
all currencies made by individuals, businesses, trusts, and government entities. Previously, depositors in Australian
financial institutions had first call on the assets in the event of a "bank" failure, but no explicit guarantee.
• On wholesale term funding, the government will guarantee all eligible term funding for Australian-owned banks, other
authorized deposit-taking institutions, Australian subsidiaries of foreign-owned banks, building societies and credit
unions. According to the Prime Minister's press release, the facility is available by application for debt issuance up
to five years, for new and existing term issuance. The Government will charge a fee in return for the service, which
effectively will be in the form of an insurance premium. The facility will be withdrawn when market conditions
normalise. The Government will release more details on these arrangements in coming days.
• Finally, the Government announced a doubling of public funds available to buy newly-issued RBMS from the A$4 billion
announced on 26 September to A$8 billion. The purchases will be made from Australian non-deposit taking lenders (i.e.
non-banks). As with the initial A$4 billion set aside last month, the purchases will be directed through the Australian
Office of Financial Management (AOFM).
In a related move, the Government has made clear that it is in a position to use accumulated Budget surpluses, which
currently measure more than A$20 billion, to provide fiscal stimulus to the weakening economy (last week we downgraded
our expected 2009 Aussie GDP growth to 1.8%, from 2.5%). The Government already has committed to bringing forward
arrangements to accelerate spending on public infrastructure, but it now looks likely that there could be a direct round
of measures announced to support households. Personal tax cuts and/or tax rebates could be announced soon, along with
additional welfare payments and special bonuses, including to the elderly.