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Regional banks under pressure -

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ELEANOR HALL: The Federal Government's announcement that it will withdraw its banking guarantee may
be a sign of the strength of Australia's major banks but it has raised concerns about competition
in the sector.

Australia's big four banks no longer need the Government's wholesale funding guarantee to raise
funds on global markets. But the nation's second-tier banks are in a more precarious position and
the Bank of Queensland is warning that the Government's action will undermine the smaller banks'
ability to compete.

Business editor Peter Ryan has more.

PETER RYAN: The wholesale funding guarantee was introduced in late 2008 after the collapse of
Lehman Brothers sparked real fears of a global financial meltdown. Banks were able to borrow the
Government's triple-A credit rating to source more than $160 billion from credit markets that were
more often than not frozen over in fear and suspicion.

The Treasurer Wayne Swan has no doubt that without the intervention; Australian banks were exposed
to a potential catastrophe.

WAYNE SWAN: It supported credit unions, it supported building societies and it supported the
second-tier banks as well. If it wasn't for the guarantee, all of those institutions would have
experienced very, very severe difficulty.

PETER RYAN: The big four banks - the ANZ, NAB, Westpac and the Commonwealth - are now raising money
without the guarantee,e giving regulators the reason to wind up the scheme at the end of March. But
second-tier banks are in a less comfortable position and say that without the guarantee they'll be
paying a greater risk margin than their major competitors.

The chief executive of the Bank of Queensland, David Liddy, says that without a staged withdrawal
second-tier banks will be penalised.

DAVID LIDDY: Oh, look I think we have been put in an uncompetitive position right throughout this
period. I think it was unintended initially but the point I want to make is that we are an
alternative to the major banks. We have continued to lend throughout this period but at the end of
the day, it's come back on our shareholders.

PETER RYAN: So how do you deal with the high funding costs? Is there a greater chance now that you
might have to pass it on through higher interest rates?

DAVID LIDDY: Look, we'll continue to perform and we'll continue to be able to provide service to
our customers but it does come at a cost. The extra cost of this guarantee is $20 million straight
to our bottom line so I would like to see that removed.

PETER RYAN: Can you absorb that cost or will you need to pass it on in other ways to your

DAVID LIDDY: Oh, look we've absorbed it for the last 12 months so you know, you've got to try and
balance shareholder needs and customer needs at the same time and that's sometimes a difficult
juggling act and I dare say we will continue to be competitive but it does come at a cost to the
overall bank.

PETER RYAN: But that's the way of changing financial world, according to Fariborz Moshirian,
professor of finance at the University of New South Wales.

FARIBORZ MOSHIRIAN: In the 21st century smaller banks are going to struggle to be able to compete
with larger banks.

PETER RYAN: Professor Moshirian says second-tier banks are now much more sensitive to global
factors and will turn to local markets to raise capital.

FARIBORZ MOSHIRIAN: We are asking basically smaller banks to rely more on Australian, if you like,
funding. Rely on, for instance, products such as mortgage-backed securities in Australia as a good
source of wholesale funding rather than going offshore.

What also we should note that the smaller banks in Australia are well rated compared to some of the
smaller banks in Europe and United States.

PETER RYAN: But the removal of the wholesale funding guarantee really does put a new gulf between
the fundraising ability of the big four banks and the second-tier banks.

FARIBORZ MOSHIRIAN: Well, that is unfortunate consequence of that but smaller banks know that they
have been always in a disadvantaged position when they compete with larger banks both in Australia
as well as in international market. So it is not as surprising, if you like, on healthy competition
between larger and smaller banks.

PETER RYAN: The wholesale guarantee ends on the 31st of March giving banks seven weeks to make the
most of the scheme and there is little doubt that the likes of Suncorp, Bank of Queensland and the
Bendigo and Adelaide Bank will be at the front of the queue.

ELEANOR HALL: Business editor, Peter Ryan.