Joint Submission from the RBA and APRA to the Inquiry into Bank Funding Guarantees 4. Use of the Guarantee Arrangements

As outlined, the government guarantee under the FCS is automatic for deposits of $1 million or less with eligible ADIs. At March 2009, deposits covered by the FCS were estimated to be around $650 billion.^[3]

Under the GS, eligible ADIs must apply to the Scheme Administrator to offer guaranteed liabilities, with slightly varying detail required for large deposits, short-term wholesale and longterm wholesale. The majority of institutions have obtained at least one guarantee certificate for large deposits, with a much smaller number obtaining guarantee certificates for short-term wholesale funding, and fewer again for long-term funding (Table 4).

In June 2009, the average daily value of guaranteed liabilities under the GS was $127.3 billion (Table 5). Reflecting the strong issuance discussed in the previous section, this predominantly reflects long-term wholesale debt, with the average value of outstanding guaranteed long-term wholesale debt almost $91 billion. Balances have risen quite consistently since the inception of the GS (Graph 10).

In contrast, usage of the guarantee for large deposits and short-term wholesale liabilities is relatively limited.

• $21 billion of deposits (around 2 per cent of total deposits) are guaranteed under the GS, an amount that has declined slightly over the past few months ( Graph 7). Liaison with ADIs suggests that most depositors with over $1 million are not seeking the guarantee when they have to pay for it. The major exception is depositors with very conservative mandates, such as trustees and councils.
• Similarly, for short-term wholesale debt (maturities of 15 months or less), most investors have not required a guarantee, with $15.4 billion in short-term wholesale liabilities (1½ per cent of wholesale liabilities) guaranteed. This amount, too, has fallen in recent months.

Guaranteed long-term wholesale issuance has been concentrated among larger, more highly rated institutions, reflecting a number of considerations. Firstly, it reflects pre-existing funding patterns, with the larger and more highly rated institutions historically making more use of wholesale long-term debt issuance. Secondly, pricing is more favourable for these institutions, both in terms of a lower guarantee fee and lower risk spreads generally being charged on their issuance by investors, commensurate with their lower risk profile. Finally, these institutions have a larger financing need.

In an international context, Australian banks are relatively large issuers of government guaranteed long-term bonds, accounting for over 11 per cent of global issuance (Table 6). In aggregate, the Australian banks have issued more of their guaranteed bonds in foreign currency than in domestic currency, consistent with their historical pattern of issuance.

Footnote

2009–10 Budget, Budget Paper No. 1: Budget Strategy and Outlook page 8–27 at <http://www.budget.gov.au/2009-10/content/bp1/downloads/bp_1.pdf> [3]