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In another sign that the economy is well on the road to recovery, the federal government has announced it will end its $190 billion wholesale funding guarantee on 31 March 2010.
Treasurer Wayne Swan made the shock announcement yesterday, sparking concern among smaller lenders that they may have to reduce their residential and business lending.
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While the decision will have no impact on the financial claims scheme that refunds depositors in the event of the collapse of their bank, credit union or building society, it does remove a form of commonwealth insurance for the wholesale funding that banks rely on to cover about half their lending.
It is predicted that smaller banks will now rush in to use the guarantee over the next few weeks to shore up their mortgage and small business finance.
However, Mr Swan said regulators had assured him that the removal of the guarantee would not harm bank lending margins or the availability of finance.
“Our regulators explicitly advise that removing the guarantee would not materially affect the banking sector funding costs,” Mr Swan said in a statement.
The banking guarantee was first implemented on 12 October 2008 and, in that time, has helped more than 150 authorised deposit taking institutions raise over $32 billion in funding from international credit markets.
