Tuesday, October 21, 2008

Unintended Consequences - Australia's bank guarantee places pressure on the on-bank financial sector

As I write, Australia's biggest and mortgage fund, Challenger Howard Mortgage Fund, is reportedly considering placing a freeze on withdrawals following a rush by depositors to withdraw funds for transfer to the now guaranteed banking sector. Other non-bank financial institutions are facing similar pressures.

The difficulty is that a guarantee intended in part to protect the global competitive position of Australia's banks also enhanced their domestic competitive position. Those withdrawing funds are apparently not retail investors, but big funders seeking protection of the unlimited guarantee.

According to the lead story in today's Australian, the Reserve Bank warned that an unlimited guarantee could severely distort competition in Australia's financial markets. It seems to be doing just that.

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