Questions & Answers about the Wholesale Funding Guarantee
- Why did the Australian Government introduce the Guarantee Scheme for Large Deposits and Wholesale Funding?
- What was position up until 27 November 2008?
- What were the arrangements from 28 November 2008?
- What securities are covered?
- What is the level of the fee?
- Who pays the fee?
- What is the timing of the fee?
- Who should investors in ADI securities contact for more information?
1. Why did the Australian Government introduce the Guarantee Scheme for Large Deposits and Wholesale Funding?
On 12 October 2008, the Australian Government announced temporary arrangements to enable the provision of a guarantee for the deposits and wholesale funding of Australian deposit-taking institutions.
In the lead up to this announcement, developments in international wholesale funding markets were restricting the ability of financial institutions both here and overseas to access funding, with potentially serious implications for liquidity and lending activity.
To address these pressures, the Government guarantee arrangements were designed to promote financial system stability in Australia, by supporting confidence and assisting authorised deposit-taking institutions (ADIs) – banks, building societies and credit unions – to continue to access funding at a time of considerable turbulence. They were also designed to ensure that Australian institutions are not placed at a disadvantage compared to their international competitors that could access similar government guarantees on their wholesale funding.
Following improvement in funding conditions, the recent or imminent closure of guarantee schemes in a number of countries, and advice from the Council of Financial Regulators that the Guarantee Scheme was no longer required, the Government announced that the Guarantee Scheme would close to new liabilities from 31 March 2010
2. What was the position up until 27 November 2008?
Up until 27 November 2008, all wholesale funding instruments eligible for the guarantee were guaranteed without charge.
3. What were the arrangements from 28 November 2008?
The Australian Government Guarantee Scheme for Large Deposits and Wholesale Funding (the Guarantee Scheme) commenced on 28 November 2008. Eligible ADIs were able to apply to the Scheme Administrator to have their new and/or existing eligible wholesale funding securities guaranteed under the Guarantee Scheme from this time. Access to the Guarantee Scheme was voluntary and subject to an approval process and other conditions, including the payment of a monthly fee by the ADI on the amounts guaranteed. The Guarantee Scheme closed to new liabilities on 31 March 2010. Existing liabilities will remain covered until maturity. See the Guarantee Scheme Closure Q&A.
Eligible ADIs could choose to apply for the Government guarantee for particular securities or programs. Investors can choose whether or not they purchase a security that is covered by the Government guarantee.
Additional arrangements applied for foreign bank branches wishing to access the Government guarantee for wholesale funding – see Foreign Bank Branches.
4. What securities are covered?
Only senior unsecured debt instruments of a not complex nature issued by ADIs were eligible for the Government guarantee.
- For short-term liabilities, eligible instruments were bank bills, certificates of deposit (including transferable deposits), commercial paper and certain debentures, with maturities up to 15 months.
- For long-term liabilities for terms to maturity of 15 months up to 60 months, eligible instruments were bonds, notes and certain debentures.
A listing of eligible institutions is at Schedule 1 of the Scheme Rules. Further information on the coverage of the Guarantee Scheme is in the Scheme Rules and the Guidance Note on the meaning of "not complex".
5. What is the level of the fee?
The same fee schedule currently applies to an ADI’s wholesale funding as to its large deposits.
The fee depends on the credit rating of the ADI, with higher rated institutions paying a lower fee.
The same fee applies regardless of the term of the security.
|Credit Rating||Fee per annum|
|AAA to AA-||70 basis points (0.7 per cent)|
|A+ to A-||100 basis points (1.0 per cent)|
|BBB+ and below and Unrated||150 basis points (1.5 per cent)|
6. Who pays the fee?
The fee is paid by the ADI and is based on the value of the securities covered by the Government guarantee.
It is up to each ADI what arrangements it makes with the debt holder as to whether and to what extent the guarantee fee is passed onto the debt holder through the pricing of the debt.
7. What is the timing of the fee?
The fee applies in respect of wholesale funding covered by the Government guarantee from 28 November 2008.
The fee is paid by the ADI monthly in arrears.
8. Who should investors in ADI securities contact for more information?
Investors in securities issued by ADIs should review the information on the Treasury and Guarantee Scheme websites and contact the relevant ADI for more information on the arrangements the ADI has made regarding the guarantee.