9 Feb 2010

Caution urged over early end to bank guarantee

9:02 am on 9 February 2010

A banking expert says the Government should be wary about withdrawing its wholesale funding guarantee facility for banks too early, despite evidence that global credit markets are returning to normal.

Australian Treasurer Wayne Swan is to withdraw the guarantee at the end of March.

A spokesman for Finance Minister Bill English says the Australian decision is a welcome sign that markets are returning to normal, and banks in New Zealand have been raising money offshore without relying on the guarantee scheme since November.

KPMG banking partner Godfrey Boyce says there's no doubt banks are getting cheaper offshore funding.

But Mr Boyce says Government support may still be required, particularly as new Reserve Bank rules forces retail banks to borrow for longer terms to reduce the impact of future financial shocks.

The Government is expected to make a decision in a few weeks on the future of the scheme, which left it with a potential liability of almost $6 billion at the end of June last year.

The retail deposit guarantee scheme is not affected.

The guarantee was introduced in November 2008, when banks stopped lending to one another, causing international credit markets to freeze.