Bank guarantee has worked as planned: RBA
July 28, 2009
The Assistant Governor of the Reserve Bank of Australia believes the Federal Government’s bank guarantee has worked, although it may have inadvertently weakened competition.
Malcolm Edey said that the guarantee could have helped stimulate the so-called ‘flight to safety’.
“There may well have been some consequences,” Dr Edey told a Senate Standing Committee on Economics inquiry into the bank funding guarantees, but said the ‘flight to safety’ had already begun occurring before the guarantee was put in place.
Dr Edey also defended the pricing structure of the guarantee - which ensures banks with higher credit ratings can access cheaper funds - and said it had been set up to make the guarantee unattractive as soon as credit conditions normalised.
“The exit has to be an important priority,” he said.
End is nigh?
Governor Glenn Stevens has today entered the bank guarantee debate by suggesting the time was approaching when banks should be weaned off the guarantee.
“These measures were necessary last October in the extreme uncertainty of the time, and played a critical role in stabilising confidence in the core of the financial system, and re-opening key capital markets. But they are undesirable as a permanent feature of the landscape,” Mr Stevens advised. “For their part, banks will need to reduce their reliance on the extended guarantees and stand on their own feet before too much longer.”
Around 50 per cent of all deposits and around 10 per cent of all wholesale bank liabilities are covered by one of the two guarantees announced last October. A joint submission by the Australian Prudential Regulation Authority and the Reserve Bank of Australia to an inquiry by the Senate’s Economics Committee into the future of the guarantee of liabilities indicated that around $650 billion in deposits of up to $1 million were covered under the Financial Claims Scheme and another $21 billion in deposits of more than $1 million covered under the guarantee on wholesale liabilities.