Four-week window for no-fee guarantee

Banks have four weeks to exploit the fee-free version of the Australian government guarantee on wholesale term borrowings, with the fees for the guarantee now coming into force on November 28.

The Treasurer, Wayne Swan, on Friday published the terms of the guarantee. Fees apply to deposits of in excess of $1 million and also to term funding.

There is now no distinction between offshore funding and domestic funding (a shift from the government's original policy position two weeks ago).

Foreign bank branches are now also eligible, though with more conditions, to make use of the guarantee.

The fee structure is simple and linked to the credit rating of institutions. AA rated banks will pay 70 basis points; A rated banks will pay 100 bps while BBB or lower rated (or unrated) banks will pay 150 basis points.

Banks, building societies and credit unions, including subsidiaries of foreign banks won't pay any fee on deposits of up to $1 million. Fees will be voluntary on deposits after that and presumably paid by the customer in the form of a lower interest rate.

The guarantee applies on term funding up to five years.

Foreign bank branches will pay the fee on deposits irrespective of size, assuming they wish to make use of it. For those banks the government limited the guarantee to short-term funding raised from Australian residents. The announcement did not define short-term funding but may mean funding of up to 12 months given that the policy rationale is to restore investor support for the bank bill market.

The inclusion of foreign bank branches in the net is the major shift in policy in the announcement, given the so far unquantified but substantial outflows from foreign banks over the two weeks since the announcement of the original form of the guarantee.