Government Guarantee Update

In October 2008, the global financial industry was under stress. 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 regulated financial institutions (including credit unions) and the raising of overseas investment.

On Sunday 7th of February 2010, the Treasurer Wayne Swan announced that the government’s guarantee for both wholesale funding and deposits of more than $1 million will expire on March 31st 2010. However the guarantee for credit union, building society and bank deposits of less than $1 million, will 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 deposit 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, building society or bank then your money will still be guaranteed until October 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 is removing on 31 March 2010 affect deposits over $1 million dollars, and the raising of overseas funds. These changes only affect people with more than $1 million in deposits, and the big banks that compete in global credit markets for funding against other borrowers.

While some people may 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 members' interests rather than making profits for shareholders or executives. To earn their profits, the big banks may expose themselves to more risks and borrow money from overseas. Credit unions on the other hand, fund the majority of their lending from Australian 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 credit unions and their members don’t really have to worry about.