Govt changes deposit guarantee scheme

An insurance premium will be imposed on bank deposits over $1 million, Treasurer
Wayne Swan has announced, as part of changes to the government's bank deposits
guarantee scheme.
Mr Swan said the scheme - first announced on October 12 as part of the government's
strategy against the global financial crisis - would be kept under review.
The guarantee applies only to authorised deposit-taking institutions, such as banks,
building societies and credit unions, but not investment funds.
Mr Swan said the measures were recommended to the government by the Council of
Financial Regulators - which comprises the Treasury, Reserve Bank, Australian
Prudential Regulation Authority (APRA) and Australian Security and Investment
Commission (ASIC).
"Deposits under $1 million are still covered for free, but deposits over $1 million
people can pay an insurance premium," Mr Swan told reporters in Brisbane.
"Deposits over $1 million account for something like .5 per cent."
Mr Swan said the premium would start on November 28.
"Till then the guarantee will be free."
Mr Swan said the changes would help make the Australian financial system even
stronger, and the government would continue to monitor the situation.
"These measures will make our financial system even more secure in the face of the
worst global financial crisis since the Great Depression," he said.
"The government will take whatever actions that are required to make sure our system
is stable and secure."
He said ASIC was working with investment management funds, which had frozen about
$12 billion, to seek a solution to their unique situation.
The solution could involve use of ASIC's modification powers under the Corporations
Act, Mr Swan said.
The deposit-taking institutions will pay the premium.
A threshold of $1 million will apply over which depositors will be charged a fee for
the guarantee consistent with the treatment of the wholesale funding guarantee.
A fee schedule to apply to wholesale funding and deposits over $1 million will be
based on the eligible institutions' credit rating, with AA-rated institutions paying
70 basis points, A rated institutions paying 100 basis points and BBB-rated and
unrated institutions paying 150 basis points.
Deposit taking institutions will have the choice to opt in to the guarantee for
their deposits above the threshold.
The scheme will be implemented using a contractual framework.
"This will ensure its speedy application which is critical to ensuring stability in
our markets and it is also consistent with international approaches," Mr Swan said.
"Foreign bank branches will be able to access the guarantee for short-term wholesale
funding raised from Australian residents at the same premium that applies to other
ADIs (authorised deposit taking institutions).
"Foreign bank branches will also be able to access the deposit guarantee in respect
of domestic deposits held by Australian residents on the basis of the fee schedule,
but with no fee-free threshold.
"This arrangement will be subject to strict limits and requirements to ensure the
funding is used only for their Australian operations."
The measures announced on Friday do not relate to the managed funds industry.
"Concerns have been expressed by industry about the impact of the current global
financial crisis on this sector," Mr Swan said.
He said the regulators "are currently assessing all relevant actions that might be
appropriate to foster the ongoing health and vitality of individual firms in this
important sector of the economy."
He said criticised Opposition Leader Malcolm Turnbull and his treasury spokeswoman
Julie Bishop of scaremongering over the guarantee issue.
"What we've had from Ms Bishop today along with Mr Turnbull is a further attempt to
discredit the guarantee for depositors to score cheap political points,"
"It's time that stopped. It's damaging to the national interest."
Mr Swan said he had always maintained that the guarantee scheme would be finetuned.
"It is the case that when you put in place a comprehensive guarantee that there are
some knock-on effects," he said.
"The government recognised that when we brought the scheme down.
"We said we would be making adjustments which is what we've done and we do expect to
be in a position ... to make further adjustments.
"That is the way of the world when you are in a global financial crisis which is so
unpredictable."
The federal opposition says the changes to the bank deposits guarantee scheme does
nothing to help people whose funds have been frozen in non-bank funds.
Opposition treasury spokeswoman Julie Bishop said the announcement is inadequate.
"Wayne Swan has failed to resolve the crisis in the investment fund market, caused
by the Rudd government's bungled implementation of an unlimited guarantee for bank
deposits," she said.
"Given the treasurer's lack of action today, Australians must assume the government
does not understand the hardship caused to people who have had their savings frozen
as a direct result of government action."
She said the only response the government had to those people was "a heartless
suggestion that they go to Centrelink."
"Wayne Swan must admit the government has made a blunder and he should take
responsibility for his actions and help people who are in hardship because their
savings are frozen," she said.
"The treasurer's announcement today does nothing to solve the problem of a flight of
funds from institutions excluded from the guarantee."