US ends wholesale guarantee in six weeks

Exit strategies are beginning to emerge, from the point of view of the governments of the major economies.

The United States appears to be setting the pace in this respect, announcing on Wednesday that the Federal Deposit Insurance Corp will end its wholesale debt guarantee program for US banks on October 31.

Britain's guarantee scheme is set to expire at the end of the year, as are many of the European schemes. To date, it has been expected that these schemes would be extended, given the poor state of many of the beneficiaries.

Will Australia rush to follow the US or will we take a more cautious approach? We have been happy to declare to the world at large the strength of our banks and the fact that they account for four of the small group of eight that continue to hold double A credit ratings. Accordingly, it would be hard to argue that the guarantee support should be continued; but more on this below.

As for continuing to support the RMBS market in Australia, the circumstances are quite different, with it being the smaller regional banks, ADIs and non-ADIs depending on this market for wholesale funding. Extension of AOFM's RMBS investment program seems likely but with the evident improvement in market conditions, AOFM should not need to provide the same level of support that it has to date.

Also, if changes are announced to the government guarantee of wholesale bank debt issuance (see below) and access to wholesale debt markets improves for the regional banks, then they may have less need to issue RMBS, at least in the short term.