Sunday, October 12, 2008

Australia guarantees all domestic bank deposits

Note to readers: I have added a brief postscript at the end of this post on the competitive implications of the Australian move.

According to breaking news reports, Australia will guarantee all bank deposits for three years and guarantee wholesale funding to Australian banks in an attempt to combat the global credit crisis. Australian will also double the funds available for mortgage-backed securities to $8 billion to help maintain liquidity for non-bank lenders. The move is apparently being coordinated with New Zealand.

The Australian move has been driven in part by competitive pressures following guarantees by other countries. Australian Prime Minister Rudd said while Australian banks were well capitalised and well regulated, the measures were needed to help Australian banks compete with others in the international market.

Under the plan, all deposits in Australian banks, building societies and credit unions, will be guaranteed by the Australian government for the next three years. Deposits in Australia tally between $600 billion and $700 billion, Mr Rudd said.

In return for the guarantees, banks would have to pay an insurance premium levied at an appropriate rate determined between treasury and the banks to ensure, in Mr Rudd's words, that this is not simply a free gift from the government by way of a guarantee to the banks.

The government will also guarantee term wholesale funding to local banks until global financial markets stabilised. This means according to Mr Rudd that anyone lending money to an Australian bank has an assurance their money is safe.


I have been watching the media comments on the Australian move. While there has been a lot of blog commentary, the main stream international media while noting the announcement has largely focused on what they see as the main game.

The Australian move will not affect stock exchange prices, Australia is too small a player, but it does have interesting implications.

At a purely domestic level, it effectively takes Australia out of the direct effects of global financial trouble. Australia will still be affected by global downturn, but the financial crisis should no longer be relevant to domestic financial market forces. Policy can instead focus again on economic fundamentals.

At a second level, it is likely to enhance the global competitive position of Australian financial institutions, something that the Australian Government clearly had in mind. The end effect here depends upon actions by other countries, but the effect is still likely to be positive.

All this, of course, depends upon the validity of my assumption about the soundness of Australian banks.

If, as I believe, there is not a problem, then the Australian move has little risk. The Government is in fact likely to make a profit out of the whole thing. If I am wrong, then all bets are off.


Amoranthus said...

Appearances are everything, they say.
I doubt this move will take Australia out of the direct effects of the global financial crisis for many reasons.
First, there is an interesting correllation of a couple of numbers. The Australian GNP is about $650b per year. Two-thirds of that figure is consumer spending. (The resources and mining sector is supposed to support the aussie economy but it only comprises about 15% of the aussie GNP. And it's being hit hard by the global crisis.
The correllating figure is the amount is the $400b+ Australia borrows from the US each year. That's approximately .. 2/3rds of the aussie GNP.

For Mr Rudd, the guarantees are just being clever. The Australian government could never pay them if things go south.
Without consumer spending based on US loans, there's no economy.

Jim Belshaw said...

Amoranthus, I wonder if you are not mixing together two things here.

The first is the financial crisis itself. This focuses especially on financial insitutions lending to each other and then to customers.

The second is the real economy. Here Australia has a balance of payments deficit, funded by overseas borrowings by the OZ banks.

Sorting out one still leaves two.