Foreign Bank Branches Want The Guarantee Too

Sydney Morning Herald

Tuesday October 21, 2008

Jacob Saulwick

THE Federal Treasury is being pressured to broaden its guarantee on bank deposits to the $280 billion tied up in branches of foreign banks in Australia, amid concerns that wholesale funds are shifting to banks whose deposits are covered.

There are worries that the Federal Government, in promising to back deposits in Australian-owned banks and licensed subsidiaries of foreign banks, has created a two-tiered banking system.

The Government's guarantee excluded branches of foreign banks, which are not allowed to take money from retail savers but can accept wholesale deposits.

"We are seeing funds moving from those that are not guaranteed to those that are," Duncan Fairweather, the executive director of the Australian Financial Markets Association, told the Herald.

"We have got an uneven playing field that it being created. Some banks are guaranteed and the others aren't.

"We are discussing the issue with Treasury. I know that they are looking at it, and I hope they understand the significance of the problem."

It is understood leading foreign banks in Australia have petitioned the Government with their concerns.

On October 12 the Government guaranteed deposits in local banks, credit unions, and in subsidiaries of foreign banks, such as ING Direct, Investec Bank (Australia), and Rabobank Australia for a period of three years. But it drew a line on backing branches of foreign banks, which do not fall under the same regulatory cover.

These branches, which include Citibank, Credit Suisse, UBS and BNB Paribas, are not allowed to accept deposits worth less than $250,000. But they are allowed to take funds from wholesale investors, including other banks, companies, super funds, and other money managers.

In March there were 33 foreign branches in Australia, with total liabilities of $280 billion, according to the Australian Prudential Regulation Authority. The branches had assets of $367 billion.

Announcing the guarantee, Treasury said some foreign branches were eligible for deposit protection and other forms of support in their home jurisdiction.

Hong Kong, Singapore and New Zealand have guaranteed the deposits of all foreign branches.

One reason the Government might want to avoid guaranteeing foreign branches would be to avoid foreign banks using their Australian base to raise funds for their international operations.

It is understood regulators have looked at ways of ring-fencing a possible guarantee.

A spokesman for the Treasurer, Wayne Swan, said the policy remained as it was. "I'm not going to add anything to that."