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Tuesday, October 28, 2008

The ever-evolving guarantee

Our Treasury is working 24/7

Deutsche Bank have just provided the following update:

"In a data flash published this morning we noted that the statement on the design and operational parameters of the deposit and wholesale funding guarantee had been removed from the Treasury's website. We speculated that there could be some amendments to the design of the guarantee. The design and operational parameters have been reinstated on the Treasury's website.

There is one substantive change from the policy as previously stated and some clearer wording on another aspect.

- The substantive change is the removal of the earlier wording that "until that date [28 November 2008] the guarantees will not be available to foreign bank branches." We take the specific removal of this statement to mean that foreign bank branches (FBBs) will be covered by the guarantee from today. That is, deposits and wholesale funding eligible for the guarantee arrangements will be covered from now.

- In terms of wording, the statement makes it clearer that the $1 million fee-free threshold "applies per depositor per institution." Thus there is explicit recognition that "all types of legal entities" will be able to split their funds across multiple Authorised Deposit Taking Institutions in order to gain access to multiple fee-free thresholds.

- In our view the ability to do this could seriously undermine the intent of the threshold, which is "reduce the incentive to move funds from the short term money market into deposits." As we move into an environment of a low cash rate the incentive to avoid the fee will grow and the large number of ADIs could see money market funds make a concerted effort to spread their cash around. If this occurs then it will seriously impact on the ability of non-bank issuers to raise funding from money market funds. We think a better policy option would have been to impose a `system' cap of $1 million on the fee-free threshold. We don't think it would have been too difficult to ensure self-regulation of this requirement, certainly for the wholesale industry."

Also tonight the Treasurer has provided more money for APRA, ASIC and the Treasury. Thank goodness...

"Today the Rudd Government is announcing additional funding for the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Department of the Treasury.

This will ensure that our regulators continue to have the resources they need to maintain the strength of Australia’s financial system during the global financial crisis.

Australia’s regulators are first class and these measures will ensure that the Australian people can continue to have absolute confidence in the performance of our regulators during the global financial crisis.

Our regulators have stepped up their monitoring and other activities as the global financial turmoil has unfolded. This has been critical in ensuring the strength of Australia’s financial system, in the face of the most significant upheaval in global financial markets since the Great Depression.

The intensification of the global financial crisis over recent weeks has resulted in a greatly increased workload for our regulators. This additional funding will ensure that the regulators continue to have sufficient resources to fulfil their roles in light of global developments.

The additional funding to APRA will also enable it to respond to applications from entities seeking to become authorised deposit-taking institutions (ADIs), where they are able to meet Australia’s prudential regulatory requirements.

As ADIs these entities would be able to take deposits and would be eligible for the Government guarantee on deposits.

The additional funding totals $83 million over four years with $21.5 million in 2008-09, $43.5 million in 2009-10, $9 million in 2010-11 and $9 million in 2011-12.
Of this additional funding, APRA will receive $9 million in 2008-09 and $18.5 million in 2009-10, and $9 million in each of 2010-11 and 2011-12 to enable it to manage the effects of the global financial crisis.

This funding will be provided from the Budget, rather than being recovered from levies on the financial sector. These arrangements will be reviewed in the 2009-10 Budget context and in light of developments in global financial markets.

Of the additional funding, ASIC will receive $10 million in 2008-09 and $20 million in 2009-10 to help it manage the domestic and international implications arising from the global financial crisis.

This funding will provide ASIC with additional ‘front-line’ resources for market monitoring and enforcement activities to further strengthen confidence in Australia’s financial markets.

Of the additional funding, Treasury will receive funding of $2.5 million in 2008-09 and $5 million in 2009-10 to ensure Australia’s regulatory environment continues to be world’s best practice and to pursue reform of the global financial architecture, through the G20 and other international forums.

The Government will ensure our regulators remain appropriately resourced throughout the global financial crisis and will continue to review funding requirements as the crisis unfolds."