KEY POINTS:
The threat of a "global catastrophe" has declined in recent weeks, said Reserve Bank of Australia Governor Glenn Stevens in a speech delivered yesterday.
"At moments like this, it is hazardous to make predictions," Stevens said at a Trans Tasman Business Circle lunch in Sydney.
"However, it seems to me that the key elements of dealing with the root issues in the crisis are starting to come into place. Policy-makers in the major countries do 'get it'. The plans are not precisely uniform across countries - that is never achievable anyway - but we can, I think, see the shape of a broad common outline. It addresses the issues of liquidity, capital and confidence. There is much more work to be done yet on the design details, and one area in which further international co-operation would be helpful is in the area of making these various guarantee arrangements broadly consistent," said Stevens.
"But the world is, it seems to me, getting on to a better path. As a result, the likelihood of a global catastrophe has in fact declined over the past couple of weeks," he said.
Meanwhile Stevens said banks were now likely to experience a period of balance sheet consolidation rather than strong asset growth.
"Perhaps we will need also to get better at turning borrowing for housing into more dwellings rather than just higher house prices," Stevens said.
"Perhaps the finance sector globally will return to fulfilling something more like its historical role of being 'the handmaiden of industry', with a bit less in the way of exotic innovation of its own," he said.
"In such a world, a renewed focus on the processes in the real economy which generate growth in productivity could also be apt."
Meanwhile Australia's politicians and banking authorities are scrambling to refine the broad deposit guarantee announced 10 days ago and to shore up any perceptions that the government acted against the Reserve Bank's advice. The Australian reported yesterday the RBA opposed a broad guarantee and wanted a limit of A$5 million on the guarantee, with a fee also.
'When the Government took its decision on the guarantee for bank deposits, it took it with the full support of the Reserve Bank," Treasurer Wayne Swan told reporters in Canberra. "The comment that there was a refusal to heed that advice from the RBA about the taking of that decision is absolutely untrue."
Stevens said in his speech that bank guarantees remain a work in progress at home and abroad.
"As is also the case in other countries, the design features of the various guarantees will be important. Little detail is available from other countries yet," he said.
"Meanwhile, the RBA is working with our colleagues in the Treasury on the details of the Australian arrangements, including on how to maintain continued healthy functioning of Australia's short-term money markets."
Australian authorities also rejected calls from foreign bank branch operations in Australia to extend the guarantee to them.
"A bank that's incorporated in Australia, that's legally regulated as an Australian institution, even if it's owned by a foreign organization is covered by the arrangements for guaranteed deposits," Finance Minister Lindsay Tanner, told Sky News. "A bank that isn't, that's essentially just an arm of a foreign bank, is a different proposition; I don't believe we will change those arrangements."
-Interest.co.nz
