UPDATE 2-Australia to end bank and funding guarantees

Sun Feb 7, 2010 12:23am EST

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(Updates throughout)

by James Grubel

CANBERRA Feb 7 (Reuters) - Australia will end its bank deposit and bank funding guarantees from the end of March, because they were no longer needed with the world recovering from the global downturn, Treasurer Wayne Swan said on Sunday,

The withdrawal is the latest move to lift crisis measures brought in during the global downturn and which helped Australia avoid recession.

Australia's central bank has lifted interest rates three times since last October to 3.75 percent from what it said were emergency levels.

The government has also been spending A$52 billion on major building and infrastructure to stimulate the economy, but has rejected calls from opposition lawmakers to wind back the spending as the economy rebounds.

Swan said the national government would also remove guarantees on state government borrowings by the end of 2010, giving states extra time to secure liquidity for new un-guaranteed bond lines.

Swan said the decision to remove the guarantees was based on advice from the Australian Council of Financial Regulators, which includes Australia's central bank boss and the head of Treasury, as well a key financial market regulators.

"The council has advised that bank funding conditions have improved such that the guarantee is no longer needed," he said, adding the removal should not lead to higher funding costs.

The guarantees, among the most world's most comprehensive when they were announced in October 2008 as the global financial crisis hit, were designed to ensure Australian banks maintained access to international funds.

But Swan said it was appropriate to withdraw the guarantees due to the strength of Australia's financial system compared to other G-20 countries which have either removed their guarantees, or which plan to do so soon.

LESSEN GOVERNMENT INTERFERENCE

In recent weeks, banking analysts have said the major Australian banks were moving away from using the guarantee in order to lessen government interference in their operations as market conditions improved.

The end of the guarantee could benefit smaller Australian mortgage funds, which have struggled to attract funding as investors shifted to guaranteed deposits.

The government previously announced up to A$16 billion to invest in the residential mortgage backed securities market, in order to sure up mortgage competition.

Swan said the guarantees had given funding certainty to more than 150 banks and financial institutions, including 110 credit unions and 11 building societies. Non-major banks used the guarantee to raise more than A$32 billion ($27.6 billion) on global markets.

He said existing guaranteed liabilities for banks and lending institutions would continue to be covered until they matured, or until October 2015 for at call deposits.

At the same time, the government's financial claims scheme will continue to protect bank deposits worth up to A$1 million, giving security to around 16 million Australians, with the cap to be reviewed in October 2011.

"The guarantee has been vital to the stability of our financial system when others were collapsing across the globe, leading to the first contraction in the global economy since World War II," Swan said.

He said Australian banks and other lenders had so far paid around A$1.1 billion to use of the guarantee and will pay around A$5.5 billion over its full life.

(Editing by Bill Tarrant)

($1=A$1.16)

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