Hatches Battened, Now Onus On Banks

Sydney Morning Herald

Tuesday October 14, 2008

Jessica Irvine Economics Correspondent

THE three-point strategy to "unclog the arteries" of the banking system has had an immediate effect, but analysts believe more details are needed.

With the Federal Government agreeing to go guarantor on all bank deposits and borrowings, pressure is mounting for greater safeguards to prevent excessive risk taking by banks.

The Greens senator Bob Brown said executive salaries for bankers were obscene and the Greens would seek to write into the legislation measures to reduce them.

"The big four banks' CEOs will get multimillion pay, but it is now the taxpayers' responsibility, rather than theirs, to assure depositors," Senator Brown said.

Figures from the Australian Prudential Regulation Authority show the potential taxpayer liability from the decision is $1.2 trillion - the amount of all deposits held with Australian banks, credit unions and building societies. But the Finance Minister, Lindsay Tanner, said the number was hypothetical because it would never be called upon.

"Were the Government to be called upon to stump up money for even a fraction of that, you would be in circumstances so diabolical that I wouldn't even want to describe them. The point is to ensure there is confidence in the Australian banking system."

As well as underwriting bank deposits, the Government will go guarantor on banks' borrowings from overseas, but it remains unclear how much that could cost.

The Prime Minister, Kevin Rudd, insisted banks would have to pay a fee to the Government in exchange for it underwriting their borrowings. The fees would be decided individually with banks.

Tomorrow: How to weather the storm - Money Liftout

What accounts are covered? The guarantee extends to all deposits including savings accounts, passbook accounts, cheque accounts, pensioner deeming accounts, term deposits, mortgage-offset accounts, farm management accounts, first home savers accounts and retirement savings accounts.

What institutions are covered? All Australian banks, credit unions and building societies, as well as deposits in Australian subsidiaries of foreign-owned banks.

Is it really unlimited? For the next three years, the guarantee is unlimited. Deposit holders have been assured they will get the full value of their deposit back in the event of a bank collapse. After three years the Government will review the scheme with a view to imposing a cap - for example, of $20,000.

What is not covered? The guarantee does not extend to superannuation, life insurance and managed funds.

Why is the government doing this now? The Government does not expect the scheme ever to be used. This is a move to boost confidence that follows similar moves in many other advanced nations. Australian banks are profitable and well capitalised.

How does it compare to other countries? Australia's limitless guarantee goes further than most other countries. Most deposit insurance schemes have a cap. In the US, it is at $US250,000 and in Britain at #50,000. Schemes in the EU are capped at EUR50,000.

© 2008 Sydney Morning Herald

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