In the wake of Lehman Brothers collapse in September 2008, credit markets around the world experienced an unprecedented era of instability as investors questioned the creditworthiness of each and every counterparty. Against this backdrop, the Australian government introduced a guarantee scheme to allow banks continued smooth access to credit markets so that they may continue to fund and operate their respective businesses.
The guarantee scheme allowed banks to issue debt that came with an explicit Commonwealth Government guarantee. The banks paid handsomely for the privilege and so far, the RBA has collected $4.5 billion on fees for guaranteeing the debt without paying out a cent as a result of a default.
The guarantee scheme also guaranteed deposits with banks and other authorised deposit taking institutions initially up to a level of $1 million before being wound back to $250,000 where it stands today. Investors have often wrongly assumed that bank deposits are guaranteed by the Commonwealth Government but prior to the guarantee scheme this was not actually the case.
The deposit scheme has been an unquestionable success on a number of fronts but most of all it allowed continued confidence in Australia’s banking system. A comprehensive review of the scheme has been conducted by researchers at the RBA and the study articulates in detail why the scheme was necessary, how it operated and why it was successful. It is well worth a read and can be accessed on the link below.
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The RBA report into the deposit guarantee scheme