First Take on Government Deposit Guarantee

Yesterday, the Australia Government took the unprecedented move of backing all Australian Deposits in a trillion dollar three year move that most of you would have heard about. This backing also includes Australian oversea’s bank borrowings which highlight the Governments concern that Australian deposits overseas are still vulnerable.

The guarantee will extends to all deposits in financial institutions for the next three years to ensure that confidence remains in the market. This guarantee also includes all term wholesale funding that Australian banks take in overseas credit markets. This, of course begs the question – will this mean that banks now take on additional risks because they know that deposits are being guaranteed?

Of course, one could quite easily argue that the need for such guarantees is unwarranted given the Governments consistent reiteration that Australian Banks are strong and that all are operating within relevant Regulatory Guidelines. In some sense, its almost two-faced – that is, the Government is constantly suggesting our Banks are in strong financial positions yet at the same time they are “guaranteeing all deposits”. It’s like suggesting that “everything is ok, but we will just back up everything in case we are wrong”. Of course, if the Government is wrong and everything is not OK – the tax payer is now going to have to foot the bill.

The Government really should have ensured that any associated capital risk measures were put in place to ensure that if Financial Institutions take unnecessary risks and risk credit on the basis of the Government backing, that they loose any guarantee.  Of course, this may already be the case and since I haven’t read the bill that was introduced I can’t specifically comment – but to introduce a ‘rushed and unprecedented guarantee’ may spell disaster if things get worse in the market.