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Aussies guarantee scheme seems more focussed

14/10/2008

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Scoopit!

You have to hand it to those Australians. This from The Australian on the bank guarantee scheme.

KEVIN Rudd’s offer to guarantee borrowings by Australian banks in international credit markets could deliver the Government a tidy profit.

Treasury officials are working on a plan to sting the big banks with fees for every dollar insured.

Government sources told The Australian a rough estimate for the fee the Government might impose when guaranteeing wholesale funding — banks’ borrowings from overseas — might range from 25 basis points to 100 basis points.

Seems a bit different from the Cullen/Bollard approach, but wait there is more:-

At the high end estimate of a 100 basis point charge, guaranteeing $1 billion in loans would deliver $10 million in revenue.

Some banks would pay more to insure than others, on a case-by-case basis determined by Treasury and the Australian Prudential Regulation Authority.

So the Aussies recognise the ‘moral hazard’ issue. Further it would appear they intend to charge a fee at lower levels of deposits.

Rudd is quoted as saying:-

“The precise insurance premiums to be attached to each of them will be negotiated separately with those institutions … mindful of their general circumstances as far as their previous lending arrangements internationally,” Mr Rudd said.

“Furthermore, the fee will also ensure that the facility is no longer utilised when market conditions normalise.”

Plus note this point, which Adam is not sure he has yet seen emerge in comment here:-

While the Australian Banking Association conceded this was a “business input” that may have to be passed on to consumers, industry experts predicted that an offset to those costs would operate because banks could access credit at cheaper prices.

For example, a AA-rated big bank in Australia could now obtain credit at lower AAA-rated prices on the world market as a result of the government guarantee, reducing its costs.

in NZ we are covering finance company deposits for valid reasons. Adam would have expected that those companies should be charged a higher fee representing the risk which they constitute.

In Adam’s view the finance companies should be told to join the scheme and should be charged an insurance premium from the first dollar of deposits. Adam does not see why finance companies should get a free ride. major well managed ones should not object as their insurance fee should be set on a basis reflecting their quality, but marginal finance companies should be closely monitored and pay a premium which reflects the risk.

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