Deposit guarantee doesn't include investment banks

The Rudd Government has ruled out extending a government guarantee to deposits held at foreign investment banks including JPMorgan Chase & Co. and UBS AG, which say the exclusion is harming their ability to source funds.

``A bank that's incorporated in Australia, that's legally regulated as an Australian institution, even if it's owned by a foreign organization is covered by the arrangements for guaranteed deposits,'' Finance Minister Lindsay Tanner, 52, told Sky News. ``A bank that isn't, that's essentially just am arm of a foreign bank, is a different proposition; I don't believe we will change those arrangements.''

Tanner's comment follows a report in the Australian newspaper today saying the Reserve Bank of Australia had voiced concerns about the consequences of the government's decision to guarantee deposits. In a letter sent to the government on Friday, the Australian heads of several investment banks said the guarantee is damaging their ability to lend to the corporate and mortgage markets, the newspaper said.

Australia's government on Oct. 12 said it would guarantee all deposits with institutions for the next three years to bolster confidence amid a worsening financial crisis. It will also guarantee all ``term wholesale funding'' by Australian banks.

``We have said all along that we will consider any necessary refinements to the guarantee, following consultation with industry and further discussion with the regulators,'' Treasurer Wayne Swan said today in a statement.

Letter

Australian chief executives from JPMorgan, UBS, Deutsche Bank AG, Societe Generale, BNP Paribas and Royal Bank of Scotland Group Plc wrote to Swan, 54, and Australian regulators saying branches wouldn't be able to source funding if they're excluded, the Australian newspaper said, citing a copy of the letter.

Reserve Bank of Australia Governor Glenn Stevens is warning that the government decision is creating ``serious dislocation'' in the financial system, the Australian reported, adding that the government has ignored the central bank's concern about the impact of an unlimited guarantee plan.

Stevens informed Ken Henry, head of the Treasury department, on Friday that a cap on guarantees should be introduced and set as low as possible, the report said. The government is considering a cap of $5 million, the Australian said, without providing details on where the information came from.

``I'm not aware of that specific advice, I'm not aware of the basis of that'' Tanner said today. ``We are in constant contact with the regulators during this turmoil.''

A central bank spokesman today told Bloomberg News that it didn't comment on newspaper reports.

Borrowing costs

Australian banks' borrowing costs rose to the highest in almost a week after financial institutions increased deposits at the central bank to a record.

The rate banks charge each other for three-month loans rose to 5.87%, the highest since Oct. 15. The difference between that rate and the overnight indexed swap rate, a measure of funding availability, rose the most since Oct. 10 to 76.25 basis points in Sydney.

Banks deposits at the Reserve Bank of Australia grew to a record A$US11.2 billion yesterday, up by A$US306 million.

Allco Finance Group, an Australian manager of infrastructure assets, said it may default on its senior debt as soon as next month as the global financial crisis cuts the value of holdings it's trying to sell.

Challenger Howard Mortgage Fund, Australia's largest, may freeze redemptions as investors return assets to banks, the Australian Financial Review said today.

Lynn Anderson, a spokeswoman for Challenger Financial Services Group Ltd., said in a telephone interview following the report's publication that ``no decision has been made.''

The fund's management is scheduled to meet today, she added.

Outflow

``If the government doesn't act, we will see the outflow of funds accelerate,'' Duncan Fairweather, executive director of the Australian Financial Markets Association said in Sydney today. ``We have put a pretty strong view to Treasury that they need to have another look at this. We hope they would, so it would be disappointing if the minister was now ruling that out.''

The Australian Financial Markets Association represents wholesale financial markets including foreign banks.
The criticism of the government's deposit guarantees and response to the global financial crisis - Prime Minister Kevin Rudd has announced a $10.4 billion economic rescue giving grants to the elderly, first home buyers and families - comes as the prime minister's popularity reaches new heights.

Rudd's approval rating rose to a record 71%, according to an ACNielsen poll published yesterday in Fairfax Media newspapers. The result makes Rudd Australia's second-most popular leader behind Labor Prime Minister Bob Hawke, who ruled from 1983 to 1991, the poll said.

Bloomberg News