We should beware of smarty pants foreign banks trying to game our system, at all times. The latest attempts by the likes of JPMorgan, UBS, Deutsche Bank AG, Societe Generale, BNP Paribas and Royal Bank of Scotland Group to get the Australian government’s deposit guarantee extended to them smacks of very special interest pleadings.

The Australian newspaper reported this, but failed to point out that a guarantee would extend to these banks the Australian Government’s AAA credit rating.

All these banks have chosen not to become ‘banks” in terms of the Australian legislation. UBS, Deutsche Bank, JPMorgan, BNP, Societe Generale and RBS all want the freedom of being “investment banks and share brokers” in Australia but none of the responsibilities of being a fully regulated bank.

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And yet their parents are all fully regulated banks in the own countries. To do big funding deals in Australia in the past or to take large share placements, they would need some sort of letter of support from their parent group because in effect they would be using their parent’s superior credit rating and larger balance sheet to do a deal in Australia. (That’s when the likes of UBS had a better credit rating than many Australian banks. No longer). Is the fact that local investors are taking money from their accounts and putting it into local banks a reflection of the inferior credit rating that all these banks enjoy in the local market, or internationally?

These investment banks have chosen to remain non-regulated by APRA to give them more freedom: to be investment banks had more cache. They were the masters of the universe, able to do big takeovers and take on big share placements. That’s how they were able to deal in the local money market in the first place. They wanted the freedom to deal. Now that’s a drawback, a negative, they want to be part of the guarantee and to grab some of the value of Australia’s AAA credit rating, at no cost it seems.

They may or may not have credit ratings equal to our big four banks, which are all AA-rated, but they don’t have the AAA rating of Australia.

But there are some other points to be made. BNP and Societe Generale received several billions in euros of support via offers of capital from the French Government Monday night, Royal Bank of Scotland is in the process of becoming a subsidiary of the UK Government; JPMorgan has received an offer of billions of dollars of fresh capital from the US Treasury.

Deutsche Bank can access a German Government guarantee and bailout fund and UBS has been bailed out by the Swiss National Bank which has injected capital and has taken around $US60 billion in dodgy assets off its balance sheet. Credit Suisse has refused capital from the Swiss National Bank, but has raised $US10 billion of fresh capital from a range of international investors to fill the holes caused by its subprime-related adventures in lending.

BNP and Credit Agricole shares surged in Paris overnight after the capital offers became public. They don’t need any help here. Anyway Societe Generale was an active funder of non bank home lending and financed so-called “warehouses” for a range of groups until it pulled up stumps at March 31 this year.

But the whole question of bank guarantees leads us to the political question: it was started by Malcolm Turnbull and Julie Bishop in a politically inspired bidding war.

Before a couple of weekend ago, we didn’t have a bank deposit guarantee system, we had a proposed process whereby people could access to the first $20,000 of their deposits in the event of a bank being rescued or merged after going bad, or people with claims against a general insurer, could get the first $20,000 of their payout in the event of the insurer failing (like HIH). The claims arrangement came out of the HIH collapse (something Malcolm Turnbull knows of intimately).

Malcolm and Julie started bidding the guarantees up. First the government pointed to the claims process legislation that was soon to be introduced (and by the way no depositors of regulated banks in this country have lost money since the 1890’s). That morphed into calls from Mal and Jules for $100,000 in deposits to be guaranteed after the Government said that the claims process effectively guaranteed the first $20,000 (which covered an estimated 85% of all bank deposits).

They kept calling for the $100,000 guarantee and then the federal Government told us that Sunday afternoon that we would have a guarantee of all bank deposits and offshore bank lending for three years.

But it’s amazing how the Canberra press gallery forgets Mal and Jules’ part in the populist process.

The Government made it clear bank deposits would be guaranteed, not money in market linked accounts, such as cash management trusts and mortgage trusts, and now some, including the federal opposition, the Australian newspaper among others seem to be trying to get the guarantee extended to those deposits, let alone the dealings of those investment banks.

The Federal Government has responded with a suggested cap of $1 million, above which an insurance fee would be charged. David Bell of the Australian Banker’s Association has objected and says bank customers will end up paying in the end. Well here’s a suggestion, how about making bank directors jointly and severally liable for all offshore funding deposits their bank now carries, and they can go and get the required insurance to add to their existing Directors and Officers policies?

Mr Bell thinks the Australian AAA rating, and the implicit support of the taxpayer comes at no cost. Someone from his members should very quickly disabuse him of that notion, or simply take away the guarantee from any bank that recovers the fee from its customers, large and small.

The Rudd Government has ruled out extending a government guarantee to deposits held at foreign investment banks including JPMorgan Chase & Co. and UBS AG, which say the exclusion is harming their ability to source funds.

“A bank that’s incorporated in Australia, that’s legally regulated as an Australian institution, even if it’s owned by a foreign organization is covered by the arrangements for guaranteed deposits,” Finance Minister Lindsay Tanner, 52, told Sky News. “A bank that isn’t, that’s essentially just am arm of a foreign bank, is a different proposition; I don’t believe we will change those arrangements.”

Tanner’s comment follows a report in The Australian newspaper today saying the Reserve Bank of Australia had voiced concerns about the consequences of the government’s decision to guarantee deposits. In a letter sent to the government on Friday, the Australian heads of several investment banks said the guarantee is damaging their ability to lend to the corporate and mortgage markets, the newspaper said.

Australia’s government on Oct. 12 said it would guarantee all deposits with institutions for the next three years to bolster confidence amid a worsening financial crisis. It will also guarantee all “term wholesale funding” by Australian banks.

“We have said all along that we will consider any necessary refinements to the guarantee, following consultation with industry and further discussion with the regulators,” Treasurer Wayne Swan said today in a statement.

Australian chief executives from JPMorgan, UBS, Deutsche Bank AG, Societe Generale, BNP Paribas and Royal Bank of Scotland Group Plc wrote to Swan, 54, and Australian regulators saying branches wouldn’t be able to source funding if they’re excluded, the Australian newspaper said, citing a copy of the letter.

Reserve Bank of Australia Governor Glenn Stevens is warning that the government decision is creating “serious dislocation” in the financial system, the Australian reported, adding that the government has ignored the central bank’s concern about the impact of an unlimited guarantee plan.

Stevens informed Ken Henry, head of the Treasury department, on Friday that a cap on guarantees should be introduced and set as low as possible, the report said. The government is considering a cap of $5 million, the Australian said, without providing details on where the information came from.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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