Banking: Aus to end federal aid for banks

Australian bank stocks slipped this morning, in part to an announcement made yesterday by the Treasury that federal aid is no longer necessary, although the cap on deposits will remain at up to AUD1 million until it is reviewed in October 2011.

"The Guarantee has been vital to the stability of our financial system when others were collapsing across the globe, leading to the first contraction in the global economy since World War II. It gave our banks continued access to global capital markets on competitive terms, which has been critical in supporting the flow of credit through the Australian economy," the Treasury said in a statement, going on to say that smaller lenders had been hit particularly hard and that the Guarantee Scheme for Large Deposits and Wholesale Funding will not be had "offered wholesale funding certainty to more than 150 Australian Authorised Deposit Taking Institutions." The scheme will be allowed to expire when it comes to a scheduled end on 31 March this year.

The Treasury says that it is acting on the advice of the Council of Financial Regulators who say that the guarantee is no longer needed.

"Importantly, our regulators explicitly advise that removing the Guarantee will not materially affect banking sector funding costs. The Council also advises that it is appropriate we withdraw our Guarantee due to the greater strength of our financial system compared to key G20 countries which have already removed their guarantee or will do so shortly. Existing guaranteed liabilities of authorised deposit-taking institutions (ADIs) will continue to be covered by the Guarantee to maturity for wholesale funding and term deposits, or to October 2015 for at call deposits. The final date for ADIs to apply for access to the Guarantee is 24 March 2010."

The Council is made up of the heads of the Reserve Bank, The Treasury, ASIC and APRA.

Existing guaranteed bonds will continue to be covered until either they mature or are bought back and extinguished by the issuer, said the statement.