Pressure mounts for Canberra to review backing for banks
The Age
Tuesday September 15, 2009
THE Federal Government is coming under pressure to overhaul its wholesale funding guarantee scheme for big banks after US regulators detailed plans to either remove or water down an equivalent support scheme from next month.A Senate economics committee is scheduled to hand down findings of its review into the Australian program on Thursday. Its report is expected to recommend changes to the pricing program, which so far has worked against smaller lenders.But speculation is mounting that Treasurer Wayne Swan is already preparing either to modify pricing for the funding backstop, which now guarantees about $121.7 billion worth of bonds issued by Australian banks, or issue a timetable to end the program.Australia is one of the few major economies that have not announced a date for the expiry of their programs."We have been happy to declare to the world at large the strength of our banks and the fact that they account for four of the small group of eight that continue to hold AA credit ratings," said Philip Bayley, who heads credit markets advisory firm ADCM Services. "Accordingly, it would be hard to argue that the guarantee support should be continued."In its latest assessment of global banking conditions, the Bank for International settlements said credit markets appeared to be stabilising. The cost of funding for banks had pulled back to the lowest level since the start of 2008.Major banks including Commonwealth and Westpac have stepped up use of the wholesale guarantee program in recent weeks, together raising more than $6.2 billion overseas.Under the current system, the four majors, which have a AA-credit rating, pay an extra 70 basis points annually for bonds issued under the guarantee, but the smaller banks pay 100 to 150 basis points extra.With deposits providing just half the funding needs of Australian banks, local lenders have enthusiastically embraced the funding guarantee.However, Mr Bayley noted that outside the big four banks and Macquarie, the banking sector had shown little appetite to issue bonds on wholesale debt markets without a government guarantee.Meanwhile, it is believed Canberra has raised hopes among smaller lenders that further support is likely across the mortgage-backed securities market, which remains a key source of financing for regional banks and non-bank lenders.Most expect that the Rudd Government will extend the Australian Office of Financial Management's $8 billion mandate to invest in low-risk Australian mortgage securities.A spokesman for the Treasurer declined to comment.
© 2009 The Age
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