Aussie deposit guarantee causing chaos as cash flees to banks

Australian media reported this morning that the blanket guarantee for wholesale and retail deposits in banks was causing chaos in Australia's mortgage trust and investing banking sectors, sparking widespread complaints from investment banks, fund managers and corporate borrowers. The Australian Financial Review reported today that the Challenger Howard Fund, the nation's biggest with A$2.9 billion in funds, was set to freeze investor redemptions later today after investors withdrew their money to put it in guaranteed bank accounts. Meanwhile the Australian reported that Reserve Bank Governor Glenn Stevens had warned Prime Minister Kevin Rudd that the scheme was causing serious disruption and needed to be changed. The Reserve Bank warned against the broad guarantee announced last Sunday and subsequently followed by New Zealand (except for the wholesale guarantee). "The RBA is arguing that the current version of the guarantee is completely distorting the market, particularly the short-term money market. It suggests the Government risks the perverse consequence of making it harder rather than easier for many Australian companies to raise funds," the Australian said. The Australian reported that JPMorgan, UBS, Deutsche Bank, Societe Generale, BNP Paribas and the Bank of Scotland sent a letter to Treasurer Wayne Swan, APRA, the RBA and the Australian Securities Commission on Friday protesting at the scheme. "If this situation is allowed to continue, foreign bank branches will not be able to source funding in the local market as a flight to guaranteed deposits occurs," they were reported as saying. * This article was first published exclusively yesterday in our daily subscription newsletter for the banking and finance industries. The email costs NZ$365 per annum and carries exclusive news and analysis for New Zealand banking and finance industry executives, regulators and investors. Sign up for a free trial here.