Australian Bank Guarantee on Wholesale Debt

by Stubborn Mule on 24 October 2008 · 3 comments

In a post earlier this week, I wrote

The Government was right to step in with the guarantee and it has doubtless provided some stability for a financial system that remains jittery, but the sooner the details are sorted out, the better.

The main outstanding question I was referring to was how the guarantee would apply to wholesale debt. Uncertainty on this point has been creating significant concern for investors in cash management trust and other managed funds. The amount of money moved from these funds to bank deposits may be over $1 billion.

Finally today, the Government announced the wholesale guarantee fee, which will also apply to retail deposits over $1 million. While there had been speculation that the fee would vary based on the time to maturity of each security, the Government has instead opted for a fixed fee. The fee varies with the credit rating of the bank taking up the guarantee.

Credit Rating Debt Issues Up to 60 Months
AA 0.70%
A 1.00%
BBB and Unrated 1.50%

To put these figures into perspective, the Bank of England is charging 0.50% plus the average over the last year of each bank’s 5 year credit default swap spread. For those who have not been following prices in the credit default swap market, these margins have been very high lately. This means that the Australian fee will be significantly lower, particularly if the fee is paid only once rather than annually (the Treasurer’s release does not make this clear).

Nevertheless, for the short-term securities favoured by cash management trusts, the 0.70% fee may seem a little high. Since the use of the wholesale guarantee is optional, banks may not take up the guarantee for these securities. If so, the exodus from cash management trusts is likely to continue, at least for smaller investors.

My own view (not that I’m giving advice!) is that leaving money in a cash management trust is not particularly risky. The deposit guarantee is undeniably good news for Australian banks as it essentially eliminates the risk of bank runs, so even uninsured debt is looking better than it was a few weeks ago. In any event, for anyone who is in the position of making a decision about a cash management trust, there is still time to make up your mind: until 28 November everything is guaranteed. After that date, wholesale debt will not be guaranteed unless the fee is paid.

UPDATE: Treasury have released a document entitled “Design and Operational Parameters” which gives a little more details, including confirmation that the fee is charges on an annual basis, although it is not clear whether securities shorter than a year will only pay a pro-rata share of the fee or the full 0.70%. The document also notes that details may change further in the future:

The deposit and wholesale guarantees contain features and variables that may require refinement or adjustment in light of market developments. These include the setting of the appropriate fee level and structure, the threshold for the deposit guarantee and the overall coverage of the scheme. The deposit and wholesale guarantee scheme will be reviewed on an ongoing basis and revised if necessary.

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1 Christopher Petteway December 10, 2009 at 8:41 am

Interesting piece of writing and info here, having multiple credit cards can also give you some negotiating power when it comes to annual charges. Once these charges are charged, you can often have them waived by telling the credit card corporation that you would rather close the checking account than pay the payment. Following all, if you have other credit cards available, then you don’t really have to theirs. Generally, they will waive the charge in order to keep the account active.

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