rba governor sounded deposits warning: report

Curious and Curiouser


AAP

As the federal government wrestles with a new bank deposit guarantee, Reserve Bank governor Glenn Stevens in secret central bank advice to the Treasury, obtained and published in The Australian, warned that the "more the guarantee is used, the bigger the problem" in financial markets.

The newspaper on Thursday says Mr Stevens also floated in his secret advice to the Treasury that the government impose a punitive insurance fee of up to $20,000 per $1 million for wholesale bank credit.

"The problem we face is that the sudden (and substantially irrational) surge in demand for guaranteed instruments is creating or is about to create serious dislocation in the financial system," Mr Stevens wrote.

The opposition has described a proposed insurance fee to be charged on deposits over $1 million as effectively a new tax.

The government has yet to decide whether it will be the depositors or the banks that will have to pay the fee.

The punitive insurance premium for wholesale banking credit was contained in written advice obtained by The Australian newspaper, sent from Mr Stevens to Treasury Secretary Ken Henry on Friday.

During his lengthy appearance at a senate estimates hearing on Wednesday, Dr Henry told the committee he and Reserve Bank governor Mr Stevens were of "one mind" in backing the guarantee's introduction.

Mr Steven's advice reveals the extent of the RBA's concerns about the distorting impact of an unlimited and free deposit guarantee on the financial system, particularly in the short-term money market.

The newspaper says it had spoken to two highly placed sources who confirmed Mr Stevens passed these concerns to Treasury before the government made its decision on October 12 on bank deposit guarantees.