Rudd's Remedy: Be A Bank

PRIME Minister Kevin Rudd has sought to defuse the crisis facing the operators of mortgage funds and other managed investments by suggesting they become banks.

But in a speech last night, Mr Rudd flatly ruled out extending the Government guarantee on bank deposits to savings in mortgage funds, cash management trusts and other market-linked investments.

Up to 250,000 people have had their investments in mortgage funds frozen to stem the tide of withdrawals created by the Government's pledge to the banks. Talks on Monday between the industry and Treasury failed to resolve the crisis.

Speaking in Melbourne, Mr Rudd drew "a fundamental bottom line" in the sand, saying the Government would guarantee savings in "prudentially regulated deposit-taking institutions" but not in "market-linked investments with higher risks and higher returns".

"No government can, in good conscience, put taxpayers' dollars at risk to support financial institutions which are not open, transparent and properly accountable to Australian regulators," Mr Rudd said.

But he suggested an alternative way out for the non-banks, by promising that if they applied to become banks, the Australian Prudential Regulation Authority (APRA) would speed their applications. "APRA stands ready to respond to applications from entities seeking to become authorised deposit-taking institutions, where they are able to meet Australia's regulatory requirements," he said.

Mr Rudd and Treasurer Wayne Swan promised an $83million increase in funding over four years for the Government's financial regulators. Most of this reflects their increased workload under the financial crisis, but they said it would also equip APRA with the resources to respond to applications from non-banks to become banks.

Industry experts last night expressed doubts over whether Mr Rudd's initiative would have any impact in the near term.

A partner at law firm Freehills, Alan Peckham, said it was difficult to see what the funds boost for regulators would achieve as a quick fix, saying that to become a bank was a long and complex process.

"You need to be able to satisfy capital adequacy requirements, so you need to find capital from somewhere. You have to satisfy APRA that you are managing all the relevant risks of being a bank," he said.

Australian Unity Investments spokesman David Bryant said the company's mortgage fund had not had time to look at the detail of the Government's proposal, but would consider taking it up.

But a source at another mortgage fund, who did not want to be identified, said the Government's offer was to allow it to "wash its hands of the problem" of the unforeseen consequences of the bank guarantee.

"It's not a practical solution to the problem. Is Australia's going to be left with only banks, because the only way you can do business in this country is to be a bank?" the source said.

The pledge to the banks came under fire from a different quarter yesterday, when Future Fund chairman David Murray, a former chief of the Commonwealth Bank, said the Government was wrong to charge a fee to guarantee bank accounts holding more than $1 million.

Mr Murray, who once attacked the idea of a deposit guarantee as "a grand new tax", told ABC radio it should be provided free to all bank accounts as "a public good".

He also warned that the downturn in the economy would end the era of big budget surpluses, leaving the Government unable to fully finance the three new funds set up to provide ongoing investment in tertiary education, hospitals and infrastructure.

In other developments:

The Australian dollar yesterday touched a five-year low of 60.12 US cents in early trade, before Reserve Bank intervention helped push it up steeply towards 62 US cents.

National Australia Bank cut its economic growth forecast for 2009 to just 1.25% after its latest business survey showed conditions weakened significantly in the September quarter to the worst levels since 2001.

An Australian National Retailers Association survey found 40% of Australians plan to save their Christmas bonus payments from the Government rather than spend them - muting the likely economic stimulus. -- With RUTH WILLIAMS, ARI SHARP

THE GOVERNMENT GUARANTEE

WHAT'S GUARANTEED

- Money placed in standard deposit accounts with Australian banks, building societies and credit unions.

- Foreign banks with branches in Australia and/or registered Australian subsidiaries.

- Amounts over $1 million will be covered only if the depositor chooses to pay a fee.

WHAT'S NOT GUARANTEED

- Market-linked investments such as: Mortgage funds Cash management trusts Property trusts Share trusts Hedge funds - Superannuation funds

WHAT'S PROPOSED

Speeding up the regulatory process to assist funds management companies that want to turn themselves into banks.

By becoming banks, or "authorised deposit-taking institutions", these companies would be able to offer their customers a government guarantee.

But they would also have to meet higher prudential standards, which would tend to result in lower returns to customers.