[LINK] Is this the case in Australia?

Michael Skeggs mike@bystander.net mskeggs at gmail.com
Fri Feb 22 09:40:15 AEDT 2013


As I understand it, it's a case of 'Yes, but'.
Australian bank deposits are guaranteed by the Federal government (up to
pretty generous levels - $250k per person, per bank).
The financial markets view this guarantee positively and price Aussie bank
debt two investment grade notches higher than it would otherwise be. (So a
bank qualifying for an S&P rating of A- becomes A+).
And the guarantee costs Australia effectively nothing, although I have
heard that the Commonwealth could borrow more and still retain its AAA
rating if the guarantee wasn't there, in reality this isn't a big deal
because the political dialogue refuses to countenance public debt as a
viable funding source, so the extra borrowing isn't available for political
reasons in any case.
If there was a GFC2 or replay of the great depression, the guarantee would
be costly to the government, and by extension all of us, but there are good
reasons to believe we would be on the hook in such a scenario anyway, that
we might as well make it explicit and put a limit on it.
A little bit of Googling and I see the scheme has been modified and is now
run by APRA, and is provided to the banks for free. It is intended that any
payouts to cover an insolvent bank could be recouped by a levy on those
that remain (good luck with that).
http://www.apra.gov.au/CrossIndustry/FCS/Pages/fcs-adi-html.aspx
At the end of the day, the banks enjoying lower borrowing costs probably
benefits consumer borrowers, as the absolute interest rate they charge will
be lower. It is reasonable to expect they would try and maintain their
profit margins if the rates they paid were higher, leading to higher
borrowing rates. That said, it would benefit investors seeking higher
returns on their term deposits etc.
The article from Bloomberg suggests in the US this 'too big to fail'
guarantee costs $83b a year, but it isn't really the case. The guarantee
represents a potential cost on the US treasury, it isn't an actual cost
that must be paid for. In theory, the guarantee might have contributed to
the US gov debt downgrade in 2011, but as this didn't impact T-bill rates,
the actual cost to US taxpayers has been nil to date.
It has been good for bank shareholders, however. The people who ultimately
pay for it are the investors buying bank debt who are getting a lower rate
of return, but to date this hasn't stopped investors continuing to buy that
debt (or government bonds).

Regards,
Michael Skeggs

On 22 February 2013 08:48, Kim Holburn <kim at holburn.net> wrote:

>
> http://www.bloomberg.com/news/2013-02-20/why-should-taxpayers-give-big-banks-83-billion-a-year-.html
>
> > Why Should Taxpayers Give Big Banks $83 Billion a Year?
>
> > So what if we told you that, by our calculations, the largest U.S. banks
> aren’t really profitable at all? What if the billions of dollars they
> allegedly earn for their shareholders were almost entirely a gift from U.S.
> taxpayers?
>
>
> --
> Kim Holburn
> IT Network & Security Consultant
> T: +61 2 61402408  M: +61 404072753
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>
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