Federal Government Cash Guarantee update
The Australian Federal Government has recently released further details on the Cash Guarantee. The new release provides information on the introduction of a $1 million fee-free threshold, plus details the fee structure and how the cash guarantee affects foreign bank branches and other investments. The Government guarantee is designed to promote financial stability during the current economic conditions.
On 12th October 2008, to support financial institutions in light of the current economic climate, the Australian Federal Government announced a guarantee of cash deposits in Australian banks, building societies and Australian incorporated branches of overseas banks. On 24th October, Federal Treasurer Wayne Swan provided further details on the Government’s plans.
Deposit guarantee
A $1 million fee-free threshold was to be introduced from 28th November 2008. Up until that time, all eligible deposits and wholesale funding will be guaranteed without charge. After that date, deposits over $1 million and wholesale funding will only be guaranteed if the relevant fee is paid.
Fee structure
A single-rate fee will apply for all maturities for eligible securities up to 60 months, with a different rate applying to eligible institutions based on their credit rating:
Credit rating debt issues up to 60 months
AA – 0.7%
A – 1.0%
BBB and Unrated – 1.5%
The new fee structure is based on advice from the Council of Financial Regulators.
Foreign bank branches
Foreign bank branches will be able to access the guarantee for short-term wholesale funding raised from Australian residents at the same premium. Foreign bank branches will also be able to access the deposit guarantee for Australian residents’ domestic deposits, but with no fee-free threshold. This arrangement will be subject to strict limits and requirements to ensure the funding is used only for these banks’ Australian operations.
Other investments
The Government has raised concerns about the non-prudentially regulated investment sector, which typically includes mortgage trusts, non-listed property trusts and debentures. These vehicles provide investment capital to a range of projects, offer investment returns to retail investors and are an important form of capital for the real economy.
It has requested ASIC provide urgent advice regarding retail investor hardship cases where redemptions may have been frozen, including using its modification powers under the Corporations Act to provide additional flexibility to fund managers and trustees.
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