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Australian and New Zealand Schemes During Global Financial Crisis

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1.0 Introduction The global financial crisis of 2007 transmitted shock waves worldwide urging international governments to prepare defensive measures to combat this economic turmoil. Hence, on 12th October 2008, the Australian and New Zealand governments introduced analogous schemes to guarantee liabilities issued by a wide range of financial institutions whereby prior to this phenomenon, neither nation had deposit insurance arrangements in place, a distinctive characteristic common in other developed nations. The Australian Government introduced a blanket guarantee on deposits namely the Australian Government Guarantee Scheme for Large Deposits and Wholesale Funding until October 2011. Consequently, it was cultured to a scheme in which the first AUD$ 1 million was to be guaranteed free of charge, with larger and foreign branch deposits able to be insured for a fee (Committee, 2009).

The Crown Retail Deposit Guarantee Scheme and Wholesale Funding Guarantee Facility were implemented at the same time in New Zealand. The initial coverage was NZ$1 million per deposit-holder per institution, but this was reduced to NZ$500,000 for bank deposits and NZ$250,000 for non-bank deposits in September 2009 when the scheme was extended to the end of 2011 (Committee, 2009).

Both governments also introduced unlimited wholesale bank debt funding guarantee schemes available for new borrowings; Whole Funding Scheme and Crown Wholesale Guarantee Scheme respectively in Australia and New Zealand. These schemes were intended to last until conditions normalized and to cover senior unsecured debt instruments with maturities up to 60 months (Schwartz, 2010). In this report, we will discuss the reasons both these countries introduced these schemes during a global financial crisis. This will be followed by the analysis of the features of the above schemes and how likely it has transform the forces shaping the economic scenario today.

2.0 Reasons for introducing Schemes in Australia and New Zealand
2.1. Global Financial Crisis The collapse of Lehman Brothers in 2008 was the turning point in the economic cycle that catalyzed the extreme uncertainty about the stability of the global financial system. This heightened aversion risk led to pressure on the availability and cost funding for banks around the world. This was reflected through the Credit Default Swap (CDS) premiums whereby the perceived risk of large banks rose to unprecedented levels (Appendix I) (Schwartz, 2010). CDS is a “contractual agreement that transfers credit risk from one party to another” (Edirisuriya, 2010). Hence, ADI’s were affected by these developments with increasing reluctance among investors to buy long-term bank debt, and signs of nervousness among some depositors.

From graph 1, it can be seen from using the sample countries of Australia, US, UK and Europe, CDS premiums reached a peak at the end of September, reflecting the rise in uncertainty following the default by Lehman Brothers. Hence, in order to stabilize the CDS premium, debt guarantees have been executed. It can be foreseen from graph 1 that the CDS premium declined drastically in the first half of October following the espousal of debt guarantees by major countries. From then on, the premium remained quite steady in all countries except the United States until the beginning of 2009 (Panetta, Faeh, Grande, Ho, King, & Levy, 2009). In the first half of January, however, CDS started climbing again and peaked around mid-March in most countries, to then gradually return to levels closer to the pre-Lehman phase.

Graph 1: Banks’ senior 5-year Credit Default Swap (CDS) Premiums (Schwartz, 2010)

2.2 Promote financial stability by assisting ADI’s to continue access funding In order to boost people’s confidence to continue depositing in ADI’s and achieve financial stability, deposit guarantee schemes (DGS) and wholesale funding guarantees (WFG) are executed.
2.2.1 Deposit Guarantee Schemes (DGS) Generally, DGS offer unambiguous deposit protection and guarantee that if a bank fails, depositors will be able to recover at least a fraction of their deposits (Cariboni, Branden, Campolongo, & De Cesare, 2008). It is introduced during financial calamity to prevent panic and ambiguity from causing bank runs leading to collapses of institutions. As in the case of both Australia and New Zealand, they may also be intended to safeguard competition by preventing a flight of deposits from smaller institutions into larger ones. These occur when depositors have the mind set that larger institutions are less likely to default (Committee, 2009).

Besides that, DGC is aimed to supply a (virtually) risk-free asset for retail savers in order to hearten or safeguard levels of savings. Unlike WFG’s, they apply to the entire stock of eligible deposits, not just new deposits made after the introduction of the guarantee (Committee, 2009).

Governments provide unequivocal guarantees against default on bank debt and other non-deposit liabilities. These actions help banks sustain access to medium term funding at sensible cost, offsetting the drying-up of substitute sources of funding (such as securitization) and the boost in credit spreads. The deliberate effect is to decrease liquidity risk and lower overall borrowing costs. The potential undesirable effects of this type of appraise include segmentation and crowding-out of other credit markets and even distortions in the functioning of bond markets (Panetta et al., 2009).

2.2.2 Wholesale Funding Guarantees (WFG)

Wholesale Funding Guarantees (WFG) was introduced to assist the continued access of local financial institutions to international financial markets on a scale corresponding with the overall financing needs of their respective countries. Rather than solving solvency problems, WFG was devised to address short-term funding and liquidity issues. Due to a “flow” problem arising from the disruption of financing channels in international wholesale debt markets, WFG was implemented and were to apply only to the new flow of debt issues (Committee, 2009).

2.3 ADI’s are not placed at a commercial disadvantage compared to their international competitors Due to the chain reaction of the Lehman Brothers collapse in September 2008, banks worldwide have adopted the strategy to explicit guarantees on liabilities to help banks access to wholesale funding. Hence, governments from countries such as Canada, France, Germany, Italy, Japan, the Netherlands, Spain, Switzerland, the United Kingdom and the United States have announced strengthening of deposit protection arrangements and the provision of guarantees for wholesale debt.

From Table 1 below, the Irish Government was the first step up by providing guarantee with an unlimited cap for deposits at the largest institutions. This was followed suit by Denmark and other countries. Around the same time as they extended deposit protection arrangements, many governments also provided guarantees over wholesale funding, partly in response to the Irish Government’s decision to do so (RBA & APRA, n.d). Only Japan and Switzerland have not formally adopted any new debt guarantee scheme, though the Swiss government did make a verbal commitment to provide guarantees in case of need (Panetta et al., 2009).

Hence, to avoid both of Australia and New Zealand to be in a disadvantage compared to their international competitors, these countries announced their respective guarantee scheme on the same date which is the 12th of October, 2008.

Table 1: Announced Wholesale Funding Guarantee Schemes (a)
Date of initial announcement(b) Country Initial finish date Initial maximum maturity date

30-Sep-08 Ireland 29-Sep-10 29-Sep-10
06-Oct-08 Denmark 30-Sep-10 30-Sep-10
06-Oct-08 Germany 31-Dec-09 31-Dec-12
08-Oct-08 United Kingdom 09-Apr-09 13-Apr-12
09-Oct-08 Belgium 31-Oct-09 31-Oct-11
10-Oct-08 Spain 01-Jul-09 01-Jul-12
12-Oct-08 Australia Unspecified Rolling 5 years
13-Oct-08 France 31-Dec-09 31-Dec-14
14-Oct-08 United States 30-Jun-09 30-Jun-12
19-Oct-08 South Korea 30-Jun-09 30-Jun-12
20-Oct-08 Sweden 30-Apr-09 30-Apr-12
21-Oct-08 Netherlands 31-Dec-09 31-Dec-12
22-Oct-08 Finland 30-Apr-09 30-Apr-14
23-Oct-08 Canada 30-Apr-09 30-Apr-12
01-Nov-08 New Zealand Unspecified Rolling 5 years

(a) Selected countries
(b) Announcement of scheme parameters typically followed the initial announcement date

Sources: BIS; central banks; debt management offices and guarantee administrators; treasury departments (Schwartz, 2010)

3.0 Discussion on Main Features
In this section, the features of Deposit Guarantee Scheme and Wholesale Funding Guarantee of both Australia and New Zealand (NZ) will be discussed, analyzed and contrasted.
3.1 Deposit Guarantee Scheme In Australia, under the Australian Government Guarantee Scheme for Large Deposits, there are two main aspects covered which are the Financial Claims Scheme (FCS) and Guarantee Scheme (GS).FCS states that deposits of $1 million of eligible ADI’s are automatically guaranteed by the Government, with no fee payable (Schwartz, 2010). Under GS, eligible ADI’s for a fee obtain a government guarantee on deposits greater than $1 million (Schwartz, 2010). On the other hand, in NZ, the Crown Retail Deposit Guarantee encompasses the DGS.

3.1.2 Features of Deposit Guarantee Scheme in Australia and New Zealand
1. Per institution limit Most schemes impose a per-institution limit on how much each participant can issue under guarantee. The limit tends to be based on either the outstanding amount of debt set to mature by a certain date, some measure of the participating institution’s liabilities or minimum issue size (Panetta et al., 2009).

In Australia, under FCS, the threshold of AUD$1 Million applies per depositor per institution. Hence, separate deposit accounts held by a depositor at an institution will be aggregated for the purpose of the threshold. Accounts held at separate institutions will not be aggregated for the purpose of the threshold (Goodman, 2009). This is also similar in NZ.

2. Eligible Institutions

In Australia, under FCS and GS, only eligible ADI’s are included which are Australian owned banks, Australian incorporated subsidiaries of foreign banks, branches of foreign banks (some restrictions), building societies, credit unions and other ADI’s. A list of eligible ADI’s can be seen in Appendix II. These ADI’S are appropriate as it is subjected to prudential regulation by the Australian Prudential Regulation Authority (APRA) in accordance with International standards (Goodman, 2009) .

In New Zealand, the eligible institutions are NZ-registered banks including unincorporated New Zealand branches of overseas banks; non-bank deposit-taking entities (including building societies, credit unions and deposit-taking finance companies) who are fully acquiescent with the requirements of their trust deeds; and Collective investment schemes [CIS] ( Portfolio Investment Entities [PIEs], super schemes, managed funds and unit trusts are subclasses) that invest solely in the debt securities of the NZ government or institutions subject to a government guarantee (New Zealand Treasury, 2008). A list of approved institutions can be referred to Appendix III.

3. Deposits covered

The guarantee will not pertain to products offered by non-ADI entities, including non-ADI subsidiaries of Australian ADI’s as these entities are not subject to Australian Prudential Regulation Authority (APRA) (Goodman, 2009) . Market linked investments products such as share portfolios and managed funds including mortgage trusts, property trusts and debentures are not covered. In addition, retirement income products including annuities are also not covered (Goodman, 2009). This also similar in NZ, whereby the scheme covers the following deposits; NZ incorporated registered banks (which includes incorporated branches of overseas banks), including deposits from both residents or non-residents; unincorporated branches of overseas banks, non-residents deposits as at 12 October 2008 , to reduce the likelihood that these depositors will leave these branches for guarantee covered institutions; For non-bank deposit takers, deposits of NZ citizens and NZ tax residents will be covered. (New Zealand Treasury, 2008).

4. Fees

In Australia and NZ, the tiered fee schedules are based on issuers’ credit ratings (Panetta et al., 2009).

Fees will be set at a single rate for all maturities for eligible securities up to 60 months, with a different rate applying to eligible ADI’s based on their credit rating under GS in Australia. The fee scale, on a per annum rate, is outlined in Table 2.

Credit Rating Debt Issues Up to 60 Months
AA 70bp
A 100bp
BBB+ and Unrated 150bp

Table 2: Current Guarantee Scheme Pricing (Goodman, 2009)

In New Zealand, for covered liabilities in excess of $5 billion a fee of 10 basis points per annum will be charged for the guarantee. The fee will be charged on the basis of the total covered liabilities, in excess of $5 billion of the institution. For non-rated non-bank deposit takers, a fee of 300 basis points per annum will be charged monthly on growth in the deposit book (New Zealand Treasury, 2008).

5. Currency

In both Australia and NZ, deposit liabilities will be covered regardless of the currency in which they are denominated in both the countries.

3.2 Wholesale Funding Scheme

The Wholesale funding scheme was implemented in Australia whereas in NZ, the Wholesale Funding Guarantee Facility was executed.

3.2.1 Features of Wholesale Funding Guarantees

1. Eligible Institutions

Eligible institutions are consistent with DGS institutions in both the countries. However, terms wholesale funding liabilities of ADI foreign (non Australian) bank branches are not covered.

2. Eligible instruments

As for eligible instruments, the focus is on newly issued senior unsecured debt in both the countries. In Australia, the instrument should be non-complex with maturities up to 15 months and they are bank bills, certificates of deposit, transferable deposits, debentures or commercial paper similar in countries such as Canada, Netherlands and United Kingdom (Panetta et al., 2009). Term funding liabilities of between 15 to 60 months are also eligible to be covered but the instrument must be a bond, note or debenture and it must also be “non complex” (Goodman, 2009). In addition applications can also be made for issuance programs to be covered. In New Zealand, no instruments that are covered under the deposit guarantee scheme will be covered under the wholesale facility.

3. Currencies Covered

In Australia and New Zealand, the facility will apply to debt issuance in all major currencies. It will apply to eligible securities issued domestically or off-shore in Australia (Goodman, 2009).
In NZ, including domestic issuance should enable managed funds and other similar entities, over time, to transfer most of their claims on NZ registered banks into instruments that are eligible for coverage under a wholesale facility (New Zealand Treasury, 2008).

4. Fees

The fees in Australia for WFG are similar to DGS. In New Zealand, a guarantee fee would be charged for each issue, differentiated by the riskiness of the issuer and the term of the security being guaranteed, as follows:

Credit Rating of Issuer Fee (bps per annum) Term at time of issue 1 year or less More than 1 year
AA- and above 85 140
A- to A+ 145 200
BBB- to BBB+ 195 250

Table 3: New Zealand’s fee pricing (New Zealand Treasury, 2008)

5. Maturity

Any paper carrying the wholesale guarantee would be covered to maturity or for up to five years from the time it is issued, whichever is the earliest. The five year rolling term is longer than the fixed two year term on the retail deposit guarantee scheme. This reflects two considerations. First, most retail deposits are for terms less than two years. Second, it is important that wholesale funding is spread out over a range of maturities to avoid the risk of concentrated rollovers, with associated macroeconomic risks, at some point in the future (Committee, 2009).

4.0 Summary and Conclusion In conclusion, the deposit guarantee schemes and wholesale guarantee schemes were introduced by both Australia and New Zealand as a measure to contest the global financial crisis. The stated intentions of both countries were similar, but their enacted guarantee schemes had differences, despite the same four major banks dominating both markets (Committee, 2009).

These schemes were introduced to promote financial system stability in Australia and New Zealand, and the ongoing provision of credit, by supporting confidence and assisting ADI’s to access funding at reasonable cost at a time of considerable turbulence. They also enhance the attractiveness of financial institutions of both the countries as borrowers in the already dislocated international financial markets, and mitigate any impact on their liquidity and lending activity (Schwartz, 2010).

Major differences between both the schemes was that in New Zealand it was “opt-in” rather than compulsory, by allowing participation from a from a wider range of financial institutions, and by imposing more risk-sensitive pricing. Both governments also introduced unlimited wholesale bank debt funding guarantee schemes available for new borrowings. These schemes were intended to last until conditions normalized and to cover senior unsecured debt instruments with maturities up to 60 months. Both schemes charged risk based fees with the New Zealand charges being generally higher and more risk sensitive (Committee, 2009). Other main differences and similarities can be seen in Table 4.

Features Deposit Guarantee Scheme (DGS) Wholesale Funding Guarantees (WFG) AUS NZ AUS NZ
Per Institution Limit Per depositor per institution Per depositor per institution - -
Eligible Institutions -Australian owned banks
-subsidiaries of foreign banks
-branches of foreign banks
-building societies
-credit unions -NZ registered banks
-branches of foreign banks
- building societies
-credit unions
-deposit-taking finance companies
-Collective Investment Scheme (CIS) Similar to DGS
(non Australian banks not covered) Similar to DGS
Deposits covered/
Eligible Instruments Cover products by ADI entities Cover products by ADI entities -Senior unsecured debt
-Non-complex Senior unsecured debt
Fees Tiered fee schedules are based on issuers’ credit ratings Tiered fee schedules are based on issuers’ credit ratings Similar to DGS Similar to DGS
Currency All All All All
Maturity Up to 60 months Up to 60 months -

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...The Australian Financial System in the 2000s: Dodging the Bullet Kevin Davis* Abstract The global financial crisis (GFC) occupied only a quarter of the decade of the 2000s but, because of its severity and implications for future financial sector development, dominates the decade. The Australian financial system coped relatively well with the GFC, raising the question of whether there was something special about its structure and prior evolution which explains that experience. This paper reviews Australian financial sector performance and development over the decade, then provides a more detailed overview of the Australian GFC experience and its implications, and considers explanations for the Australian financial sector resilience. 1. Introduction The Australian (and global) financial system entered the first decade of the millennium preparing for a systems crisis, in the form of the Y2K computer scare, which on 1 January 2000 passed without event. But towards the end of the decade, the financial sector was faced with, arguably, its most serious systemic crisis ever, which the Australian financial system and economy weathered relatively well compared with advanced nations in the northern hemisphere.1 While the GFC occupied only one-quarter of the past decade (from mid 2007), it prompts the questions which this review must seek to answer. Was there something about the structure and evolution of the Australian financial system which explained its resilience in the face...

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...Sustainable Decision-Making in a Time of Crisis Public and Private Perspectives Malcolm McIntosh and Susan Forbes Authors Malcolm McIntosh Director, Asia Pacific Centre for Sustainable Enterprise Susan M Forbes Adjunct Research Fellow, Asia Pacific Centre for Sustainable Enterprise © 2011 Asia Pacific Centre for Sustainable Enterprise Published by Asia Pacific Centre for Sustainable Enterprise Griffith Business School Griffith University, South Bank campus 226 Grey Street, South Brisbane Queensland, 4101 Australia www.griffith.edu.au/business-commerce/sustainable-enterprise All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic or mechanical, photocopying, recording or otherwise without the prior permission of the copyright owner. Copyright rests with the individual authors. ISBN 978-1-921760-45-7 Foreword The conference reflected lessons learnt and being learned from the global financial crisis, from the climate change prognosis and from rethinking global governance. The conference preceded the Asia-Pacific Economic Cooperation (APEC) 2010 Meetings and Summit (7-14 November in Yokohama, Japan) and coincided with the 10th anniversary of the United Nations (UN) Global Compact, and the UN Year of Biodiversity. Given the birth of the G20 group of nations, the inexorable diffusion of economic power to the Asia Pacific region, and the rise of new organisational forms......

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