Chapter 1
Introduction
The referral
1.1
The Senate has referred the matter of the government guarantees provided
to authorised deposit-taking institutions to the Economics References Committee.
The referral on 23 June 2009 required the Committee to report by 15 September
2009, but this was later extended to 17 September.
Summary of the guarantees
1.2
In response to the global financial crisis, the Government introduced in
October 2008 two guarantee schemes for authorised deposit-taking institutions[1]
(ADIs i.e. banks including Australian subsidiaries of foreign banks, building
societies and credit unions):
-
an unlimited deposit guarantee, which will operate until October 2011.
The first million dollars are guaranteed free of charge under an expanded
Financial Claims Scheme (FCS). Larger deposits can be insured for a fee, as can
deposits of foreign bank branches;
-
an unlimited wholesale bank funding guarantee which will last 'until
conditions normalise'. The guarantee is available for short-term liabilities
such as bank bills, certificates of deposit, commercial paper and certain
debentures with initial maturities of up to 15 months and to long-term
liabilities such as bonds, notes and certain debentures with terms of maturity
of 15 to 60 months. A fee is charged for this guarantee, of 70 basis points per
annum for credit ratings of AAA to AA-; 100 basis points for ratings of A+ to
A- and 150 basis points for lower or unrated securities.
1.3
The guarantees cover over 16 million deposit accounts and over 99 per
cent of depositors.[2]
Treasury described the scale of the scheme:
Around $650 billion of deposits are guaranteed under the FCS.
A further $21 billion in large deposits, $15 billion in short-term wholesale
funding and $91 billion in long-term wholesale funding are guaranteed under the
Guarantee Scheme. The total stock of guaranteed liabilities continues to grow,
reflecting growth in deposits and long-term wholesale issuance.[3]
Background
1.4
The Reserve Bank of Australia (RBA) and the Australian Prudential
Regulation Authority (APRA) characterise the economic background to the
introduction of the guarantees as follows:
In the latter part of 2008, heightened risk aversion led to
pressure on the availability and cost of funding for banks around the world. In
September 2008, the collapse of Lehman Brothers triggered extreme uncertainty
about the stability of the global financial system, and a virtual closure of
parts of global capital markets. Despite their ongoing good performance,
Australian ADIs were affected by these developments with increasing reluctance
among investors to buy long-term bank debt, and signs of nervousness among some
depositors.[4]
1.5
By comparison with other countries, the Australian guarantees had a very
broad coverage:
The duration announced was three years (longer than that
announced by several other countries), amount of coverage was without limit and
100 percent (several countries had put limits on amount and percentage
insured), and it included both retail and wholesale deposits at all banks
(several countries restricted it to retail deposits and certain institutions
only) and was fee free (several countries had fee in place).[5]
1.6
However, Australia did not go as far with other extraordinary actions
such as capital injections (or even nationalisation) to stabilise the financial
systems as a number of other countries (Table 1.1).[6]
This reflected the fact that our system was far more stable and better
regulated than those in most other nations because of prudential arrangements
put in place by the Coalition. As such, Australian institutions have not
engaged to the same extent in the types of risky practices which occurred
elsewhere.
Table 1.1
Source: BIS, 79th
Annual Report, 2009, p 103.
1.7
The wholesale funding guarantees were mostly introduced during the
period September‑November 2008 which the Bank for International
Settlements (BIS) has identified as the most severe stage of the global
financial crisis, when equity markets recorded the sharpest falls and interest
rate spreads spiked (Chart 1.1) and many countries injected capital into
financial institutions as central banks slashed their policy rates.
Chart 1.1
Source: BIS, 79th
Annual Report, 2009, p 16.
1.8
The finance industry described the background as one of increasing
unease by depositors:
Understandably, depositors and investors were becoming
nervous as bad news on the international financial scene continued. In early
October 2008, AFC had reports from various members that an increasing number of
depositors and investors had been enquiring about the soundness of the
institution and the safety of their deposit/investment. Money was starting to
be withdrawn and notice given that term investments would not be renewed by the
customers. Some AFC members were becoming very concerned about the public’s
wavering confidence just prior to the late October announcement of the
guarantee of ADI retail deposits.[7]
1.9
This financial turmoil led to calls for government action to reassure
depositors. On 10 October 2008, the Leader of the Opposition called for the
proposed $20,000 cap on the deposit guarantee to be raised to $100,000. On 11
October, he advocated that the Government:
Increase the proposed Government backed deposit guarantee
scheme to cover deposits up to a minimum of $100,000. In the light of the
current global economic crisis, the Coalition considers that the proposed
$20,000 cap per person is less than adequate and, moreover, out of line with
similar schemes in the rest of the world. Accordingly, the Coalition proposes
that the cap be increased to allow Australians, including small businesses,
additional assurance in these difficult times.[8]
Conduct of the inquiry
1.10
The committee advertised the inquiry in the national press and invited
written submissions by 24 July 2009. Details of the inquiry were placed on the
committee's website and the committee also wrote to a number of organisations
and stakeholder groups inviting written submissions. The 27 submissions
received by the committee are listed in Appendix 1.
1.11
Three public hearings were held by the committee, in Sydney on 28 July
2009 and in Canberra on 14 and 18 August 2009. A list of witnesses appearing
before the committee at hearings is provided at Appendix 2.
1.12
The committee thanks all those who participated in this inquiry.
Structure of the report
1.13
The deposit guarantee and the wholesale funding guarantee are discussed
in Chapters 2 and 3 respectively. Their impact on banks, other financial
institutions and markets are the subject of Chapter 4. The final chapter
examines the transition to a permanent scheme of depositor protection and the
form it might take.
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