Bowen: Govt guarantee prevented bank "run"

by BN10 Sep 2009

Federal financial services minister Chris Bowen has defended the government's guarantee of retail and wholesale deposits, saying it protected financial institutions from collapse.

Speaking on ABC Breakfast today, Bowen rejected the notion that it needed to be removed as a matter of urgency due to it, in the words of ABC journalist Joe O'Brien, having "seriously skewed the market in terms of home loans being offered, with the big four totally dominating that market now".

Bowen said the bank guarantee had been "absolutely vital in ensuring continued confidence in the Australian financial system and the sustainability of the Australian financial system". 

"We need to remember the type of environment we are dealing with when we brought this guarantee in, it's been very important in ensuring that Australia is one of the very few developed countries around the world not to have a run on a financial institution," he added.

In relation to the wholesale guarantee, Bowen said the pricing mechanism ensures that banks won't use it for any longer than they need to "because it is expensive". 

"We did that on purpose so it would naturally wean off and we're been involved in discussions through the G20 about the future of the guarantee because you can't one off just withdraw the guarantee, it would leave Australia's financial system exposed if we simply withdraw it as a matter of urgency as you would suggest while other countries keep it in place," he added.

Under the government's guarantee system, the big four banks, which have higher credit ratings have been able to secure funding at half the cost of regional and second tier banks, which have lower credit ratings.

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