Deposit guarantee staved off bank distress

The financial flap of September and October 2008 was a threat of sorts to the stability of the banking system in Australia, and the announcement on 12 October 2008 by the Australian government of a guarantee over deposits definitely did save a bank, or two or three. Or so suggest the Australian Prudential Regulation Authority and the Reserve Bank of Australia to an inquiry by the Senate's Economics Committee into the future of the guarantee of liabilities.

The government guarantees over deposits and wholesale borrowing "were introduced in response to extraordinary developments in the global financial system" the regulators reminded readers of their submission in the introduction.

"They were designed to support confidence of depositors in authorised deposit-taking institutions and to help ensure that these institutions continued to have access to capital markets.

"The arrangements have been successful in meeting these objectives and as such, they have made an important contribution to the stability of the Australian financial system. They have also ensured that the overall availability of funding has not been a constraint on the capacity of Australian banks to lend."

 More tellingly, the two regulators wrote that "the effects were seen most immediately in movements in deposits, to which the guarantee immediately applied.

"In particular, following the announcement there was a reversal in potentially destabilising deposit outflows from a number of ADIs that had been evident in early October."