Fitch Ratings-Sydney-09 February 2010: On the 7th February 2010, the Australian government announced the removal of the wholesale funding guarantee, thereby expressing its confidence in the ability of Australian banks to access wholesale funding markets. The final date for banks to apply for access to the guarantee is 24 March 2010, signalling an end to the emergency measures that facilitated the flow of credit after wholesale funding markets were severely disrupted by the collapse of Lehman Brothers in October 2008.

In the 10 months following the introduction of the guarantee to 31 July 2009, AUD110.5bn of Australian bank long-term wholesale debt was guaranteed, while in the last five months of 2009, only a further AUD23.3bn of long-term wholesale debt was guaranteed, reflecting a stabilisation of funding market conditions and an increase in unguaranteed issuance. This stabilisation is one of the key reasons given for the removal of guarantee. In its statement, the Australian government notes advice from the Council of Financial Regulators (consisting of the heads of the Reserve Bank of Australia, the Australian Treasury, the Australian Prudential Regulation Authority and the Australia Securities and Investment Commission), indicating that no Australian bank needs the guarantee to fund itself, and that banking sector funding costs will not be materially affected by its removal. The Australian government also cited the termination of similar schemes in other countries to date or in the near future as a further reason for removing the guarantee.

Wholesale issues and term deposits greater than AUD1m will remain guaranteed until maturity; for at call deposits of greater than AUD1m, the guarantee will be removed in October 2015. (A separate scheme was used to guarantee all retail deposits of less than AUD1m; this scheme is to be reviewed in October 2011.) Fitch expects that the removal of the guarantee is unlikely to have a material impact on Australian banks, which have been issuing unguaranteed for a number of months. There are also encouraging signs that Australia's mortgage securitisation market is beginning to thaw.

Australian banks continue to have a high reliance on offshore wholesale funding markets and this makes them vulnerable to a dislocation of the magnitude that occurred following the collapse of Lehman Brothers in late 2008. Fitch believes the removal of the guarantee at this time will have no discernable impact on the stability of the Australian banking system or the ratings of any individual bank. However, should a further severe systemic disruption occur, Fitch believes the government would again be willing to take appropriate action to preserve stability.