Guarantee Bold Move

The Age

Monday October 13, 2008

Eric Johnston, Financial Services Editor

WHILE a measure to protect deposits will grab the headlines, the real kicker is the fiscally brave decision by the Rudd Government to guarantee all money that Australian banks borrow internationally.

Around the world, the frozen credit markets have been sending shock waves through the banking system, sapping confidence from the global financial markets with devastating effect.

Australian banks have just been given a leg-up with their AA balance sheets now given an implicit AAA rating courtesy of the Federal Government.

But this will have little near-term impact given that the shortage of liquidity in global wholesale markets is so severe, even well-rated banks are unable to borrow funds.

Australian banks rely on wholesale markets for about half of their lending activity, and nearly all locked in the bulk of their funding needs at the start of the year.

With interbank rates at record highs, no major lender will even bother attempting to tap global wholesale markets over the next two months.

Either the global crisis hasn't yet hit home or Australians have actually been listening to government and bank rhetoric about their deposits being safe.

The latest figures from the Australian Prudential Regulation Authority show deposits are growing at an annualised rate of 13%.

The big banks including Commonwealth Bank and National Australia Bank are reporting a surge in deposits in recent weeks, mostly as investors switch away from shares and into cash.

But by acting before any Australian bank shows signs of teetering, the Rudd Government has learnt from the lessons of Europe and the US, where governments found it harder to restore confidence after the panic had set in.

Australian banks are well regulated. Substantial growth at home over the past 10 years meant Australian banks did not take on bad loans that went toxic.

But they remain an intrinsic part of the global banking system that, in itself, is in critical condition.

© 2008 The Age

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