Reserve Bank governor Glenn Stevens has made it clear that he doesn’t like the idea of a government bank deposit guarantee, as we have at the moment and doesn’t want to see it return after it is withdrawn.

The guarantee is just over a year old, having been introduced last October as banks and financial groups tottered in the wake of the Lehman Brothers collapse and the problems at Fannie Mae and Freddie Mac.

The guarantee has helped steady the bank deposit market here and helped the banks raise money domestically and internationally. In recent months, more and more bank deposit raisings have been done without the guarantee and at lower and lower spreads as fears about risk subside.

Last Friday saw troubled Brisbane financial group Suncorp Metway (which owns the Metway Bank and a clutch of insurance brands) raise (300 million pounds in European markets, or $525 million) and without government support. However the bank was quoted in the Fairfax business media as saying it was Suncorp’s first issue without the protection of the federal government’s guarantee and the country’s Triple A credit rating.

“Suncorp’s banking group executive, David Foster, said the raising was another indication that wholesale funding markets were becoming more accessible, but he cautioned they were still some way short of full recovery.

”We received strong feedback from overseas investors about their confidence in the stability of the Australian banking system and Suncorp’s own prospects. But international debt markets were ”not yet at the point” where the government should consider withdrawing the funding guarantee,” he said. “The underpinning support of the guarantee will still be required, but clearly everyone will be trying hard to maximise issue without the guarantee as quickly as we can.”

He and Suncorp look like being disappointed.

Last Thursday Stevens made it clear in Perth that he saw the guarantee ending, and ending soon when he said he thought the banks “will be ready to cope without it pretty soon, actually”.

But he then went on the rule-it-out being held in reserve for the “next” time.

“I do not think that we should have a system where, at the first sign of trouble, the guarantee gets turned back on. We don’t want to do that again.

“We want to make clear that this was a one-in-75-year event. What was done had to be done, but it shouldn’t be done again. It shouldn’t be expected to be done again.

“And we want the financial system to not put governments in the position again where it would need to be done.

“Yes there is a moral hazard problem. There always is if you take these sorts of steps to stabilise a system and that is the dilemma that a policy maker on the day faces. He’s got a long-run moral-hazard problem that will get worse if he does something; if he doesn’t do it, the problem won’t be moral hazard but it will be a much bigger problem by this time tomorrow, possibly.

“So that’s the dilemma that policy makers around the world found themselves in, and they had to do what was needed to stabilise things in the short term.

“But we do not want to go to a world where there’s an optional guarantee. That is not what we want.

“What we want is to exit from this in a measured way and not have it happen again, and to spend the time between now and the next financial upset — and there will be one some day, that’s the nature of things — to spend the time between now and then making the system more robust so that the governments don’t have to make that choice again.”

They are the most emphatic comments on the guarantee from the RBA governor since it was introduced just over a year ago.

The phrase “necessary evil” comes to mind to describe Stevens’ view of the idea.

That would indicate he and the bank would oppose suggestions by some in the banks (and in political circles) that the guarantee be converted to something approaching the US system, which normally supports bank deposits up to $US100,000 (increased to $US250,000 for the crunch, but unlikely to fall). The US system hasn’t stopped people suffering losses, or taxpayers as the main regulator, the FDIC, has been forced to shut 99 banks so far this year (25 in 2008).

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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