latest news - Government Withdraws Bank Funding Guarantee and State Guarantee

The Federal Government will withdraw its Guarantee Scheme for Large Deposits and Wholesale Funding (the Guarantee) from 5pm on 31 March 2010.  This move does not affect the Financial Claims Scheme, which will continue giving over 16 million Australians certainty over their deposits of up to $1 million until the cap is reviewed in October 2011.

The Guarantee was first announced on 12 October 2008 in the face of severe dislocation on global credit markets which forced most G20 member countries to introduce some form of funding guarantee.

The Council of Financial Regulators which consists of the heads of the Reserve Bank, Treasury, ASIC and APRA, has advised the Government that bank funding conditions have improved such that the Guarantee is no longer needed, and that no Australian institution will need the Guarantee to fund themselves.

The Council also advises that it is appropriate that the Government withdraw its Guarantee due to the greater strength of Australia's financial system compared to key G20 countries which have already removed their guarantee or will do so shortly.

Existing guaranteed liabilities of authorised deposit-taking institutions (ADIs) will continue to be covered by the Guarantee to maturity for wholesale funding and term deposits, or to October 2015 for at call deposits. The final date for ADIs to apply for access to the Guarantee is 24 March 2010.

Importantly, the Australian regulators explicitly advise that removing the Guarantee will not materially affect banking sector funding costs.

The Government has also announced the closure of the Guarantee of State and Territory Borrowing (State Guarantee) which has been critical to maintaining the capacity of state and territory governments to deliver on vital nation building investments.

The Government will close the State Guarantee to new issuance on 31 December 2010. The longer withdrawal period relative to the Guarantee of Large Deposits and Wholesale Funding is needed for states to establish liquidity in new unguaranteed bond lines.

Issuing bonds under existing lines is a critical source of funding for the states, so all states and territories will continue have access to the guarantee until the end of this year.

Existing guaranteed bonds will continue to be covered until either they mature or are bought back and extinguished by the issuer.

For further information, please contact:

Jane Newman | Associate
Mullins Lawyers
t +61 7 3224 0369
f +61 7 3224 0333
jnewman@mullinslaw.com.au