Bank funding guarantee likely to be dropped

Wayne Swan. Photo / Mark Mitchell

New Zealand looks likely to ditch the wholesale funding guarantee for banks soon, after Australian Treasurer Wayne Swan announced on Sunday his country's version would end next month.

New Zealand followed Australia's lead by introducing the wholesale guarantee alongside a retail deposit guarantee during the depths of the global financial crisis in 2008.

The schemes were intended to ensure local banks could continue to access wholesale funding on overseas markets by using government balance sheets as a backstop.

Swan said the wholesale guarantee was no longer needed as the world recovered from the global downturn.

The decision to remove the guarantee was based on advice from the Australian Council of Financial Regulators, which includes Australia's central bank governor and the head of Treasury, as well as financial market regulators.

"The council has advised that bank funding conditions have improved such that the guarantee is no longer needed," he said, adding the removal should not lead to higher funding costs.

A spokesman for Finance Minister Bill English said the news from Australia was a welcome sign that financial markets had returned to relative stability.

"From New Zealand's perspective, given the global market improvements and New Zealand's success in raising wholesale funds without using the guarantee, the Government is considering withdrawing the wholesale guarantee facility.

"We will announce any changes as soon as any decisions are made and that could be a matter of weeks," the spokesman added."

A spokesman for Treasury, which has been administering the scheme, told the Business Herald about $10.7 billion of wholesale funding had been guaranteed under the scheme, but the last time it had been used was in November last year.

Director of Massey University's Centre for Banking Studies, David Tripe said the scheme was "no longer incredibly important".

"I don't think it matters nearly as much as it did 18 months or 16 months ago. The banks can issue without guarantees now and they are doing so, at least to some extent," he said.

"I would not be at all surprised to see the wholesale guarantee disappear and I'd be surprised if it made much difference," said Tripe.

The United States, Canada, France and South Korea have already withdrawn their bank guarantees, and Britain, Sweden, Germany, Spain, Ireland and Denmark are expected to follow this year, Australian media reported.

PricewaterhouseCoopers financial services partner Sam Shuttleworth said neither the Australian decision nor the response from English were surprising.

"Government always talked about an orderly exit when things started to free up and I think this is what they are indicating now."

"The question in the back of your mind is 'is the liquidity risk well and truly removed?'."

Shuttleworth noted the global financial system had been running for some time on vast quantities of cash pumped in through governments' "quantitative easing" policies which must come to an end at some point.

"When QE is stopped what does that mean to a normal funding market operating on a normal basis?"

"Will it be business as usual or will there be some risk that markets become fragile again? Only time will tell."

Australia is retaining its version of the retail funding guarantee until October 2011.

New Zealand's retail funding guarantee ends in October but will be replaced by an extended scheme which will run for a further 14 months.

Additional reporting agencies