SYDNEY: Australia’s treasurer said on Sunday the government would withdraw its bank funding guarantee due to improved conditions, ending a scheme put in place at the height of the global crisis.

Treasurer Wayne Swan said the Council of Financial Regulators had recommended ending the measure, which he said had been vital in stabilising Australia’s banking system “when others were collapsing across the globe”.

“It gave our banks continued access to global capital markets on competitive terms, which has been critical in supporting the flow of credit through the Australian economy,” he said.

Under the scheme, first announced on October 12, 2008, the government guaranteed the wholesale debt obligations of Australian banks provided they paid a fee.

Swan said the guarantee, which will be withdrawn on March 31, had helped support competition in the banking sector during the global crisis, which hit smaller lenders particularly hard.

“Without the guarantee, our banks would have lent less and interest rates for borrowers would have been far higher,” Swan told reporters.

“This would have led directly to lower growth and more households losing a bread winner right across this country.”

The Council of Financial Regulators – which includes the heads of the central bank and the Treasury – had advised that bank funding conditions had improved to the extent that the guarantee was no longer needed, Swan said.

The Council deemed that removing the guarantee would not materially affect bank sector funding costs.

“The Council also advises that it is appropriate we withdraw our guarantee due to the greater strength of our financial system compared to key G20 countries which have already removed their guarantee or will do so shortly.”

The scheme was part of a set of measures announced by centre-left Labor Prime Minister Kevin Rudd in October 2008 to steady the banking system in the face of global financial turmoil.

These included the free guarantee of investor deposits in banks, building societies and other institutions up to the level of one million dollars – a measure that will remain in place until at least October 2011.

A guarantee on deposits over one million dollars, for which a fee was charged, will expire next month, Swan said.

Australia has been dubbed the “Wonder from Down Under” after government stimulus and Chinese demand for resources helped it avoid recession despite the global downturn and become the first advanced economy to raise interest rates last October.

AFP/ms, 07 February 2010

australia, Interest rates, recovery