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Canberra under pressure to protect savings.



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RN PM Canberra under pressure to protect savings

06/10/2008

MARK COLVIN: The German Government has moved to calm people worried about their savings with a promise that depositors won't lose a single Euro. The Government says it'll guarantee all private savings accounts.

Ireland and Greece did the same thing last week.

The German Government's pledge came as officials worked on a new rescue package for one of the country's biggest commercial property lenders.

Australia has never explicitly guaranteed bank deposits but there's now mounting pressure to do so.

Brendan Trembath reports.

BRENDAN TREMBATH: The credit crisis is deepening in Europe's largest economy. The German Government has been working overtime to broker the rescue of the nation's fourth biggest bank and senior ministers have been making promises to try to stop a run on banks.

Peer Steinbrueck is Germany's Finance Minister.

PEER STEINBRUECK (translated): I would like to stress the point that as a result of the sense of shared responsibility we in the Federal Government feel we want to ensure that German savers should not have to fear the possibility that they might lose even one Euro. This is an important signal aimed at calming the situation down.

BRENDAN TREMBATH: Australia is one of the few developed countries which does not guarantee bank deposits but there's now increased pressure to join the group.

Professor John Quiggin is the federation fellow in economics and political science at the University of Queensland.

JOHN QUIGGIN: If we see a chain reaction of governments rushing to guarantee deposits, it will be very difficult to avoid Australia following suit for fear of people wondering whether their deposits are in fact safe.

BRENDAN TREMBATH: While Australia does not guarantee deposits there is another form of protection.

JOHN QUIGGIN: There's always been a clear understanding that under any reasonable circumstances, given the prudential regulation we have, that deposits will be safe and so that guarantee has been enough, implicit guarantee has been enough to keep people happy and I guess authorities have wanted both to maintain a bit of flexibility and to avoid the administrative overhead of a deposit insurance scheme.

BRENDAN TREMBATH: There are other arguments against introducing Federal deposit insurance. They include that banks and savers could take more risks, knowing accounts were federally protected.

Professor Kevin Davis, the director of the Melbourne Centre for Financial Studies does not see the system changing.

KEVIN DAVIS: Australia has never had deposit insurance and previous governments and regulators have argued that one reason we haven't needed it has been that we've had a system of depositor preference which means that all depositors into Australian depository institutions - banks, building societies and credit unions - rank ahead of all other claimants in the event of a failure.

If you put together the structure of the Australian banks balance sheet where they rely very much on overseas borrowings and strong prudential regulation, then it would take an enormous crisis before you got to a situation where they wouldn't have assets sufficient to meet depositors' claims. I think we're still a long way away from that situation in Australia.

BRENDAN TREMBATH: Even though this is a big financial crisis in the world at the moment?

KEVIN DAVIS: It is a big financial crisis in the world and as we know a number of the other, in other countries various governments have instituted effectively 100 per cent guarantees or increased their guarantee amounts and that reflects the fact I think basically that deposit insurance is a very good mechanism for protecting depositors in the case of an isolated bank failure, but in the case of a major crisis ultimately governments step in and do other things.

BRENDAN TREMBATH: With the system of preference in Australia, has that been tested yet?

KEVIN DAVIS: Effectively no because we haven't had any near failures in Australia of any banks and the only failures we've really had were back in the late 80s, early 90s with Pyramid Building Society. So in a sense we've been very lucky to have to put the issue to the test.

MARK COLVIN: Professor Kevin Davis with Brendan Trembath there.

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