Murray explicit on significance of guarantees

Any lingering doubt that major banks in Australia exploit an "implicit guarantee" in funding their businesses was blown away by the clarity of the language used in the final report of the Financial System Inquiry yesterday.

"Actions taken by governments both in Australia and overseas to support their financial sectors during the GFC have reinforced perceptions of an implicit guarantee," David Murray's panel said.

"Implicit guarantees arise when creditors believe that, if a bank were to fail, the government would step in to rescue the institution.

"Implicit guarantees reduce banks' funding costs by moving risk from private investors onto the Government balance sheet — a contingent liability for Government.

"As a result, the creditor takes no (or a reduced) loss, making it less risky to invest in the institution. Creditors will therefore accept a lower interest rate, which lowers funding costs for the bank and provides a competitive advantage to those institutions most affected," the report said.

It cited IMF and credit rating agency studies that found "Australian ADIs, especially the largest ADIs, benefit from an implicit guarantee."

"The inquiry considers that these factors provide a compelling case for ensuring Australian ADIs have unquestionably strong capital ratios," the report said.