Bank guarantee “here to stay”
Posted October 19, 2008on:
So says Dr Cullen, and I think his description of why is pretty spot on:
it will be difficult in two years to return to a situation where bank deposits were no longer insured by the government
When financial institution base there decision on the fact that this new framework exists, changing the framework would be problematic and painful – making it harder to remove it. Furthermore, as he says, when every other country has a scheme we sort of get stuck having to have one – or else we have to pay a higher premium on our credit (assuming of course that the private sector can’t provide insurance as efficiently – a debatable assumption).
Dr Cullen also points out a major concern that:
excessive amounts of money that could flow into finance companies to chase the guarantee for two years
In that case, why don’t they let the Reserve Bank adjust insurance premiums based on risk – the companies have to show a credit rating anyway, so the better the rating the lower the premiums. At the moment the larger organisations, which also have better credit ratings, are paying MORE for this insurance – it is ridiculous.
As Dr Cullen has identified the problem, why doesn’t he fix it?