Reform of wholesale guarantee fees must be close

The future of the guarantee scheme for wholesale debt issuance by the banks has been debated for some time now, with many market participants calling for the abolition of the guarantee and Treasurer, Wayne Swan, resolutely resisting. But decision time is now here and as stated above it seems obvious that the guarantee must now be removed.

However, outside of the big four banks and Macquarie, the remainder of the banking sector has demonstrated no ability to issue in wholesale debt markets, domestic or offshore, without a government guarantee. This may give cause for caution and to consideration of some form of restructuring of the guarantee scheme rather than outright removal.

Indeed, speculation in the market last week was that changes to the pricing of the guarantee, such that the pricing disadvantage to the regional banks and smaller institutions will be removed, will soon be announced. It was said that a flat 100 basis points guarantee fee will be introduced.

This will not give any immediate advantage to Suncorp-Metway, as it already pays a 100 bps fee, but it will give a boost to Bendigo and Adelaide Bank, Bank of Queensland and many other ADIs. More significantly though, the pricing advantage of the big four banks will be eliminated and indeed, government-guaranteed issuance will effectively be penalised.

If this speculation proves accurate, guaranteed issuance from the big four in the domestic market is probably over for good but a rush of guaranteed issuance from the regional banks and smaller ADIs is highly likely.

No doubt the big four banks will also want to move to non-guaranteed issuance offshore as quickly as possible but until they can, greater domestic issuance may be preferred. This could see spreads widen again in the domestic market, at least in the short term.