As much of the world’s banking system collapses into the arms of furious and shell-shocked governments, the Australian cartel is sitting there solid as a rock.

Sure, the combined market capitalisation of the Big Five plunged by 6% or $10 billion to $176 billion in morning trade today, but so far Australian authorities have maintained official interest rates way above the global average and haven’t even formally guaranteed deposits.

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A deposit insurance scheme was meant to be introduced after the collapse of HIH Insurance in 2001 but the financial giants resisted and we’ve had little more than dithering ever since.

At one level, formally guaranteeing deposits is a sign of weakness and we should resist for as long as possible. However, because the $20,000 deposit insurance scheme has already been announced, it is time to get on with it given that most of the world has moved.

Australia’s two A-rated second tier banks BankWest and Suncorp have already put up the white flag, so the focus now moves to the likes of Bank of Queensland and Bendigo Bank.

BoQ delivered a strong profit yesterday but the fact remains that it is BBB-rated and has a balance sheet with $28 billion in liabilities, which is half funded by deposits and half by the wholesale market.

Formalising the deposit insurance scheme would protest its $14 billion deposit base and CEO David Liddy declared yesterday BoQ it would be “first in the queue” for the federal government’s $4 billion investment plans for the mortgage securities market.

When you consider that our banks have about $120 billion to roll over in the coming year, the government will definitely have to expand this program if foreign markets remain frozen.

The Reserve Bank has already been stoking short term market liquidity but it has plenty more capacity on top of the $30 billion in official foreign reserves. And with the gold price soaring whilst the Aussie dollar plunges, now would be a great time to flog the Reserve Bank’s residual gold reserves, although such a move would be viewed as weakness and a sign of panic.

Whilst our banks are well capitalised, the two biggest vulnerabilities are lack of access to foreign markets and a surge in bad debts if the housing market crashes.

Given this scenario, maybe the Future Fund should accept a $1 billion placement of shares in each of the Big Four banks at tonight’s closing prices. That would deploy just 10% of its existing $40 billion in cash reserves and bring it up to about market weightings for the financial services sector in Australia.

Given that foreign banks and investors are rapidly withdrawing loans and capital from Australia to shore up their home markets, it makes sense to further strengthen our banks to ensure they can continue pumping credit through the Australian economy.

Now is not the time to be too proud to have a little bit of overt government assistance for our banks.

Look here for today’s crazy-brave purchases in this plunging market.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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