Home News Banks told not to use guarantee closure as an excuse to raise rates

Banks told not to use guarantee closure as an excuse to raise rates

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Federal treasurer Wayne Swan has warned the major banks not to use the removal of the government's wholesale funding guarantee to raise their interest rates.

Swan said the decision to stop the guarantee was made based on the unanimous advice of the Council of Financial Regulators that no Australian bank, building society or credit union will need the guarantee to fund itself due to improvements in bank funding conditions.

"Our highly-regarded financial regulators have explicitly advised that removing the guarantee will not materially affect banking sector funding costs. So there will be absolutely no justification for any bank to raise interest rates beyond any future Reserve Bank movement, given banks' interest margins are back above pre-crisis levels," he said.

The guarantee was put in place at the height of the global recession to ensure banking stability.

"The guarantee has been a vital part of Australia's economic defences during the global recession," said Swan. "At a time of massive turmoil in global financial markets, the guarantee has helped ensure Australia's financial stability and the continued flow of credit through our economy. Without it, our banks would have lent less at higher interest rates, leading to lower growth and higher unemployment. It has also been vital in helping to support banking competition by offering funding certainty to Australian non-major ADIs, who used it to raise over $65 billion in cheaper funding."

Swan said Australian depositors will continue to be protected by the Rudd Government's Financial Claims Scheme - a separate policy giving free coverage for all deposits up to $1 million. That $1 million cap will continue until at least October 2011, when it will be reviewed.

"Together with the Rudd Government's direct investment of up to $16 billion in the RMBS market and continued guarantee of deposits up to $1 million, this is helping smaller lenders keep lending at competitive interest rates to put pressure on the big banks," he said. 

The banks and other lenders have so far paid around $1.3 billion for the use of the guarantee, and will pay around $5.5 billion over its full life.

 

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