Government puts credit crisis in rear-view mirror

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The Government’s bank guarantee will be withdrawn at the end March, the Treasurer Wayne Swan announced yesterday.

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Swan acted on the advice of the Council of Financial Regulators, which said no Australian institution now requires the guarantee to obtain funding.

The Council, which consists of the heads of the Reserve Bank, the Treasury, the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority, advised that removing the guarantee would “not materially affect banking sector funding costs”.

The Government said Australian banks and other lenders had paid about $1.1 billion for the use of the guarantee, and are expected to pay about $5.5 billion over its full life.

Swan defended the Government’s decision to introduce the guarantee, saying it was “vital to the stability of our financial system when others were collapsing across the globe”.

“Without the guarantee, our banks would have lent less and interest rates for borrowers would have been higher, leading to lower growth and higher unemployment,” the statement from Swan’s office said.

Swan argued the guarantee had been “vital in helping to support competition in the banking sector throughout the global financial crisis, which hit smaller lenders particularly hard”.

The Treasurer pointed to the $32 billion in funding raised by non-major Australian banks from international credit markets as well as the Government’s investment in the residential mortgage backed securities market as being key to helping “smaller lenders to continue lending at competitive interest rates and competing with the big banks”.

Australia has taken longer than a number of other G20 countries to remove its bank guarantee, with many having removed theirs ahead of Australia.

The Financial Claims Scheme, which guarantees bank deposits of up to $1 million, will remain in place until October next year, at which time it will be reviewed, Swan said.

The Government has also announced the closure of the Guarantee of State and Territory Borrowing from December 31, 2010.