Australia guarantees bank deposits to combat crisis

By James Grubel and Adrian Bathgate

CANBERRA/WELLINGTON (Reuters) - Australia and New Zealand gave a blanket guarantee to all bank deposits Sunday in a move likely to raise pressure on other economies to do the same, amid a crisis of confidence in the global financial system.

The two neighbors, both dominated by Australia's four major lenders, had portrayed themselves as having strong bank systems, especially Australia whose government and regulators gave repeated assurances it was well placed to weather the storm.

But Australian Prime Minister Kevin Rudd called a snap news conference Sunday to say his government would guarantee Australia's entire deposit base of A$600-A$700 billion ($386-$450 billion) for three years and guarantee wholesale bank funding.

"We are in the economic equivalent of a national security crisis, and the challenges are great," Rudd said.

He referred to recent moves by other economies, such as Britain, Germany and Ireland, to extend guarantees or state aid to their banking systems and said Australian banks could be disadvantaged if his government failed to act.

"I don't want a first-class Australian bank discriminated against because some other foreign bank, which has a bad balance sheet, is being propped up by a guarantee by a foreign government," Rudd told reporters.

The country's top four lenders are: National Australia Bank, Australia and New Zealand Banking Group, Commonwealth Bank and Westpac Banking Corp

New Zealand Prime Minister Helen Clark announced her deposit guarantee scheme moments later, though she gave no time frame.

"Our government has agreed to implement a deposit guarantee scheme which will provide New Zealand depositors with additional confidence," Clark told broadcaster TVNZ at the launch of her ruling Labor Party's campaign for the November 8 election.

The New Zealand scheme charges a guarantee fee of 10 basis points a year for institutions with deposits exceeding NZ$5 billion ($2.97 billion).

PRESSURE FOR OTHERS TO FOLLOW

Both countries said their guarantees should not be taken as a sign of weakness in their banking systems.

Rudd quoted local regulators as saying bank finances remained in good order. "Right now, the balance sheets look great," he told reporters. "Our banks and our financial institutions are in first-class financial order.

"This measure puts our banks on a similar footing to other banking systems around the world."

Australia would also make an extra A$4 billion available for mortgage-backed securities market to help maintain liquidity for non-bank lenders, Rudd said, adding that the measures were part of an international response to the crisis.