Friday, October 10, 2008

Banks Need A Guarantee Just As Much As We Do

Amidst the panic of the Global Financial Crisis, there is growing pressure on the Australian Government to provide a guarantee for bank depositors. Indeed, the Government is already planning a measure to guarantee deposits up to $20 000. But that is a pathetic and tokenistic guarantee which provides no certainty for people who have spent a lifetime saving up a nest egg for their later years. But the problem is that it’s not just the customers who need a decent guarantee. It is the banks themselves.

All the available evidence suggests that Australia’s banks are in a sound position, more so than most around the world. For heaven’s sake, you would expect that they are after pocketing record multi billion dollar profits year after year. It’s been twenty years since the last time a major Australian bank even looked like getting a little bit wobbly. Although we’ve all grumbled about excessive bank fees and profits over the years, those profits should mean that the banks remain strong now.

While there is no reason to hold concerns about the capacity of our banks to weather the storm, there is another problem. All around the world, other countries are providing their banks with depositor guarantees, and not for a piddling $20 000. Those guarantees are generally around $200 000. This obviously protects the depositor, but it also protects the bank against a potential run. That means that it will be easier for a bank with such a guarantee to borrow from the international money markets. So for Australian banks without such a guarantee, it becomes even more difficult to access wholesale funds, despite the fact that they remain strong.

Now, it is possible for our banks to get by without access to wholesale money for a time because they do have strong capital reserves. But without that access, the tightening of credit will only get worse, and flow through to even further reductions in consumer spending. When that happens, the prospect of a recession becomes much more likely.

So, the right thing for the Rudd Government to do is to guarantee our bank deposits, not just for our peace of mind, but to keep the banking system functional, and reduce the risk of recession.

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