Government guarantee changes

In October 2008, the global financial industry was being walloped. To ease some of the worry that financial institutions and their customers were experiencing the Australian government put in place a range of guarantees on deposits held with financial institutions and the raising of overseas investment.

On Sunday 7th of February, the Treasurer Wayne Swan announced that part of the government’s guarantee would expire this year. The government guarantees for both wholesale funding and deposits of more than $1 million would expire on March 31. The guarantee for bank deposits of less than $1 million however, would remain until at least October 2011 Mr Swan added.

So what does that mean for you?
Well, if you don’t have a million dollars in your bank account, then it doesn’t affect you at all. If you, like most Australians, have less than a million dollars in deposits in a credit union or bank then your money will still be guaranteed until the end of 2011.

So what has changed?
The government believes that the threat from the global financial crisis has reduced to a level where it can begin to remove some of its guarantees. The guarantees that the government are removing at the end of March affect deposits over $1 million dollars, and the raising of overseas investment. These changes only affect those with large sums of money in deposits, and the big banks that compete in global credit markets for funding against other borrowers.

While many people think otherwise, credit unions are actually safer than the large banks. As credit unions are owned by their members, there is more of a focus on member’s interests rather than making profits for shareholders or executives. To earn their profits, the big banks have to expose themselves to more risks and borrow money from overseas. Credit unions on the other hand, fund the majority of their lending from household deposits held by local people in their community.

Basically, the government is letting the big banks deal with their own risk. That’s a healthy sign for our economy and something which the safer credit unions and their members don’t really have to worry about.