Questions & Answers about the Guarantee Scheme Closure to New Liabilities

1. Why did the Government decide to close the Guarantee Scheme?
2. How was the Scheme closed?
3. What has happened to the guarantee of wholesale liabilities that were issued prior to 31 March 2010?
4. How are Large Deposits treated after 31 March 2010?
5. What did the changes mean for deposits covered by the Financial Claims Scheme?
6. What did the Consultation Process Involve?

1. Why did the Government decide to close the Guarantee Scheme?

The Guarantee Scheme has made an important contribution to financial stability in Australia by ensuring that eligible institutions retained access to wholesale funding during the international crisis. This in turn allowed the system to continue lending.

However, the Council of Financial Regulators, comprising the Reserve Bank of Australia, the Australian Treasury, the Australian Prudential Regulation Authority, and the Australian Securities and Investments Commission advised the Government that financial market conditions had improved to the point where the Guarantee Scheme was no longer required.

A number of other countries had already closed their schemes and the majority of the remaining schemes were scheduled to close on or before 30 June 2010.

Given the improvement in wholesale funding conditions, the relative strength of the Australian banking sector, the recent or imminent closure of guarantee schemes in key countries, and the advice of the Council, the Government determined that it was appropriate to close the Guarantee Scheme at that time.

2. How was the Scheme closed?

Closure of the Scheme was effected by:

• the Final Application Date (FAD) of 24 March 2010. This was the final date on which eligible ADIs could apply to the Scheme Administrator for an Eligibility Certificate. Eligibility Certificates enable ADIs to issue guaranteed wholesale debt, or apply the guarantee to deposit accounts; and
• the Final Issuance Date (FID) of 31 March 2010. This was the final date on which ADIs could issue new guaranteed securities, or establish new guaranteed deposit accounts. The guaranteed holdings of depositors with existing guaranteed accounts was capped at their guaranteed balances on the FID.
  • The FID was designed to ensure a firm closure of the Scheme on 31 March 2010. The Scheme Rules were amended to create the FID.

The Government liaised with banking sector representatives on the changes to the Scheme Rules to ensure a smooth exit from the arrangements.

3. What has happened to the guarantee of wholesale liabilities that were issued prior to 31 March 2010?

Guaranteed wholesale liabilities will be guaranteed to maturity (which may be up to five years). Guarantee Scheme fees will continue to apply to maturity.

4. How are Large Deposits be treated after 31 March 2010?

Depositors could elect to be covered by the Guarantee Scheme until 31 March 2010.  Depositors who covered their balances above $1 million under the Guarantee Scheme have those funds covered to maturity, for term deposits up to five years, or until October 2015 for at call deposits.

For at call accounts, the amount covered is capped at the closing guaranteed amount on 31 March 2010.  Deposits and interest payments after this date will only be covered if the guaranteed balance has fallen below the capped amount. They will only be covered up to the capped amount. For term deposits, interest paid after 31 March 2010 on term deposits will be guaranteed to maturity.

Statutory trust accounts are treated in the same way as other large deposit accounts. The amount covered is capped at the closing guaranteed amount on 31 March 2010. Deposits and interest payments after this date will only be covered if the guaranteed balance has fallen below the capped amount. They will only be covered up to the capped amount.

Guarantee Scheme fees will continue to apply throughout the period for which the guarantee applies to the respective deposits. The fee waiver for guaranteed amounts held in statutory trust accounts will also continue to apply.

The Financial Claims Scheme will continue to provide a free guarantee of deposits up to and including $1 million and changing to $250,000 from 1 February 2012.

5. What did the changes mean for deposits covered by the Financial Claims Scheme?

Deposits up to and including $1 million and changing to $250,000 from 1 February 2012 will continue to be covered for free by the Financial Claims Scheme. People can find out more about the Financial Claims Scheme from the Australian Prudential Regulation Authority at www.apra.gov.au or through the hotline 1300 558 849.

6. What did the Consultation Process Involve?

The Government worked with banking sector representatives on the mechanics of exit arrangements, to ensure a smooth transition into the post-Guarantee Scheme environment.