Guarantee Scheme Settles Jitters

The Age

Saturday November 29, 2008

Eric Johnston

THE Government's deposit guarantee scheme has helped stem the loss of funds among some smaller and offshore-owned banks that had come under pressure at the height of the global banking crisis.

The latest figures compiled by the Australian Prudential Regulation Authority showed the number of nervous customers ploughing funds into bigger lenders had slowed in the two weeks after the Government said it would stand behind all Australian bank deposits.

Some, such as BankWest, which suffered a significant outflow of deposits in September, managed to win back customers after the introduction of the guarantee.

At the time of the program's introduction, Treasurer Wayne Swan insisted the scheme was aimed at keeping the nation's financial services system competitive in the face of similar guarantees being introduced around the world.

However, bank executives had privately expressed concerns that funds were being channelled into banks with stronger credit rating, at the expense of smaller lenders.

BankWest, which is in the process of being acquired by Commonwealth Bank of Australia, increased deposits by $158million to more than $36billion, reversing a 6.5 per cent drop a month earlier.

Still, Dutch-owned ING, which operates online bank ING Direct, continued to experience a deposit outflow, but the $105million drop during October had slowed from the $1billion outflow during September.

The major banks continued to lift deposits, adding to the argument that the big four have done relatively well out of the credit crisis, grabbing a large share of deposits and strengthening their grip on the mortgage market.

Commonwealth Bank's deposit base grew 2.2 per cent to $243billion while National Australia Bank's deposits of $204billion shot up 10.6 per cent from a month earlier.

The figures come as the big four banks were planning to pass on the full cost of the deposit guarantee to customers on an opt-in basis as the program started yesterday.

Customers with more than $1million that choose to use the guarantee, will be charged the Government-imposed fee of 0.7 per cent. Funds up to $1million will be guaranteed without any fees.

At the same time Macquarie Group, which has a lower credit rating than the major banks, says it will, for now, absorb the fee payable on customer accounts of more than $1million.

Several banks reported a modest level of inquiries about the scheme.

Given the freeze in global credit markets, banks have been more reliant on deposits to fund their day-to-day lending activity.

APRA chairman John Laker said yesterday signs were emerging that global funding markets were beginning to thaw as a result of global regulatory responses to the banking crisis.

While the financial system still needed "substantial repair", he cautioned it was important for regulators not to over-react in their response to the crisis.

While there was further work to do, Mr Laker said the Australian financial system was sound.

© 2008 The Age

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