Joint Submission from the RBA and APRA to the Inquiry into Bank Funding Guarantees 1. Background to Introduction of the Guarantee Arrangements

In the latter part of 2008, heightened risk aversion led to pressure on the availability and cost of funding for banks around the world. In September 2008, the collapse of Lehman Brothers triggered extreme uncertainty about the stability of the global financial system, and a virtual closure of parts of global capital markets. Despite their ongoing good performance, Australian ADIs were affected by these developments with increasing reluctance among investors to buy long-term bank debt, and signs of nervousness among some depositors.

Against this backdrop, a number of governments announced strengthening of deposit protection arrangements and the provision of guarantees for wholesale debt. In many cases, the former involved changes to the caps applying to existing deposit protection arrangements. The Irish Government was the first to act in late September by providing a guarantee with an unlimited cap for deposits at the largest institutions, an approach followed by Austria and Denmark. In other countries, including the United States, United Kingdom and a number of EU countries the existing caps were significantly increased. Around the same time as they extended deposit protection arrangements, many governments also provided guarantees over wholesale funding, partly in response to the Irish Government's decision to do so. (Details of international deposit protection and wholesale guarantee arrangements are provided in the section below).

The Australian Government also moved to reassure depositors and investors in Australian ADIs, and to ensure that Australian ADIs were not disadvantaged compared to banks in other countries, by announcing guarantee arrangements for deposits and wholesale funding. This was announced on 12 October, with further details – including a guarantee fee on large deposits – announced on 24 October following advice from the Council of Financial Regulators. The Government noted in its announcement that the guarantee scheme arrangements would be reviewed on an ongoing basis and revised if necessary. The guarantee arrangements became fully operational on 28 November after a period of close co-ordination between Council agencies – in consultation with ADIs – to establish the necessary rules, processes, documentation and architecture.