Scramble To Sort Out Bank Guarantees

Sydney Morning Herald

Thursday October 16, 2008

Jessica Irvine Economics Correspondent

PRESSURE is mounting on the Federal Government to spell out details of its guarantee on deposits and banks' wholesale borrowing amid concern the measures could encourage risky behaviour by lenders and leave taxpayer's exposed to billions of dollars of liability.

Treasury officials are scrambling to figure out the details of what insurance premium will be charged on banks who take up the wholesale borrowing guarantee, and what, if any, conditions will be imposed in return for the guarantee on all deposits.

It is understood Treasury is considering a fee of between 0.25 percentage points and 1 percentage point to be charged on all bank borrowing that is guaranteed. This will vary from bank to bank depending on their credit rating and the type of borrowing. The race is on to pin this number down before banks need to roll over the next batch of two-to five-year debt.

The head of research at nabCapital, Peter Jolly, estimated about $850 billion worth of borrowing may be eligible to be covered by the guarantee.

However, "the degree to which the banks use the guarantee service will presumably depend on the insurance fee," he said.

Mr Jolly said taxpayers could even make money on the deal, if it turned out that the Government never had to step in to pay the debts of a failed bank.

"The higher the fee the Government gets, then that's beneficial to the taxpayer. But they don't want to structure it so high that there is no advantage to the banks, and then they don't use the facility and there is no flow-on effect [through reduced funding costs] to home borrowers."

Assuming half of all borrowing were guaranteed, roughly $400 billion, and an insurance levy of 0.5 percentage points imposed, taxpayers could earn $2 billion a year from the levy.

The Opposition Leader, Malcolm Turnbull, accused the Government yesterday of having "no exit strategy" from its commitment on wholesale funding, which ran the risk of encouraging "imprudent behaviour".

"We do not want to get into a situation where unsuitable practices by the banks are supported and continue by virtue of the Commonwealth's guarantee."

However, the imposition of an insurance premium means that in the future, as borrowing costs fall around the world, it will become uneconomic to keep paying the premium, and banks will opt to raise funds without it.

On the issue of bank deposit guarantees, it has become apparent the Government's proposed scheme imposes fewer restrictions on financial institutions than schemes elsewhere.

New Zealand authorities announced yesterday they would impose stricter requirements on non-bank deposit takers covered by their deposit guarantee, including getting directors to sign undertakings that they will not strip out funds through dividends or payments to related parties.

The total size of Australian deposits covered by the guarantee is estimated at $1.2 trillion. However, it is not expected the scheme will ever be used.

In the event of an individual bank collapse, the Government would intervene to give people timely access to their money. This would later be recovered from the capital of the failed bank.

The Government is yet to clarify whether any remaining gap would be raised through a levy on other banks or paid out of taxpayer money.

"There are many questions raised by the blanket guarantee," Mr Jolly said, including why deposit-taking institutions with a lower credit rating were getting the same protection as AA-rated banks for the same cost.