The global financial crisis of 2007 transmitted shock waves worldwide urging international governments to prepare defensive measures to combat this economic turmoil. Hence, on 12th October 2008, the Australian and New Zealand governments introduced analogous schemes to guarantee liabilities issued by a wide range of financial institutions whereby prior to this phenomenon, neither nation had deposit insurance arrangements in place, a distinctive characteristic common in other developed nations.
The Australian Government introduced a blanket guarantee on deposits namely the Australian Government Guarantee Scheme for Large Deposits and Wholesale Funding until October 2011. Consequently, it was cultured to a scheme in which the first AUD$ 1 million was to be guaranteed free of charge, with larger and foreign branch deposits able to be insured for a fee (Committee, 2009).
The Crown Retail Deposit Guarantee Scheme and Wholesale Funding Guarantee Facility were implemented at the same time in New Zealand. The initial coverage was NZ$1 million per deposit-holder per institution, but this was reduced to NZ$500,000 for bank deposits and NZ$250,000 for non-bank deposits in September 2009 when the scheme was extended to the end of 2011 (Committee, 2009).
Both governments also introduced unlimited wholesale bank debt funding guarantee schemes available for new borrowings; Whole Funding Scheme and Crown Wholesale Guarantee Scheme respectively in Australia and New Zealand. These schemes were intended to last until conditions normalized and to cover senior unsecured debt instruments with maturities up to 60 months (Schwartz, 2010).
In this report, we will discuss the reasons both these countries introduced these schemes during a global financial crisis. This will be followed by the analysis of the features of the above schemes and how likely it has transform the forces shaping the economic scenario today.
2.0 Reasons for introducing Schemes in Australia and New Zealand 2.1. Global Financial Crisis
The collapse of Lehman Brothers in 2008 was the turning point in the economic cycle that catalyzed the extreme uncertainty about the stability of the global financial system. This heightened aversion risk led to pressure on the availability and cost funding for banks around the world. This was reflected through the Credit Default Swap (CDS) premiums whereby the perceived risk of large banks rose to unprecedented levels (Appendix I) (Schwartz, 2010). CDS is a “contractual agreement that transfers credit risk from one party to another” (Edirisuriya, 2010). Hence, ADI’s were affected by these developments with increasing reluctance among investors to buy long-term bank debt, and signs of nervousness among some depositors.
From graph 1, it can be seen from using the sample countries of Australia, US, UK and Europe, CDS premiums reached a peak at the end of September, reflecting the rise in uncertainty following the default by Lehman Brothers. Hence, in order to stabilize the CDS premium, debt guarantees have been executed.
It can be foreseen from graph 1 that the CDS premium declined drastically in the first half of October following the espousal of debt guarantees by major countries. From then on, the premium remained quite steady in all countries except the United States until the beginning of 2009 (Panetta, Faeh, Grande, Ho, King, & Levy, 2009). In the first half of January, however, CDS started climbing again and peaked around mid-March in most countries, to then gradually return to levels closer to the pre-Lehman phase.
Graph 1: Banks’ senior 5-year Credit Default Swap (CDS) Premiums (Schwartz, 2010)
2.2 Promote financial stability by assisting ADI’s to continue access funding
In order to boost people’s confidence to continue depositing in ADI’s and achieve financial stability, deposit guarantee schemes (DGS) and wholesale funding guarantees (WFG) are executed. 2.2.1 Deposit...