Liam Walsh The Courier-Mail 07 October 2013
AS the banking world convulsed, tellers in Australia soothed worried customers.
Clients were calling. They wanted reassurance their deposits were safe.
Some wanted to withdraw money. Others wanted to dump long-term locked accounts. A few wanted to put cash - $10,000, maybe more - across different banks, hoping to spread the risk.
It was October 2008 and the paranoiac height of the global financial crisis. US investment bank Lehman Brothers had collapsed weeks earlier, UK lender Northern Rock had already been nationalised and concern was infecting Australia.
But five years ago this Saturday, the Commonwealth stepped in, guaranteeing deposits along with the wholesale funds that banks themselves borrowed.
"It (provided) the fence … against this global meltdown," former Treasurer Wayne Swan recalls. "The global economy was falling off a cliff."
Speaking from his Brisbane office, the politician regards the guarantee as "one of the most important decisions" taken by the government.
It had special ramifications for Queensland; the state is regionally spread, and so populated by smaller credit unions or mid-level banks such as Bank of Queensland and Suncorp.
And some smaller institutions had suffered with customers siphoning deposits into Big Four banks, which were perceived, rightly or wrongly, as safer.
That behaviour is reflected in a confidential October 2008 briefing from the Reserve Bank of Australia and Australian Prudential Regulation Authority, obtained by The Courier-Mail under Freedom of Information laws. It said before the guarantee that some regional and smaller institutions were seeing "outflows to the major banks".
Even worse, Lehman's collapse froze wholesale funding markets, which banks worldwide use for lending, amid fears about who might crumble next.
Swan says the government and agencies had long planned for disastrous scenarios, and tells of almost weekly phone-ins with overseas counterparts such as US Secretary of Treasury Hank Paulson, who once publicly talked of a "bazooka" option of taxpayer support for US institutions. One day, Swan even had had intensive dental work, so spoke to overseas counterparts through a numb mouth.
A big issue was that public fear about bank stability was infectious, even if just a rumour. "That stuff can be fatal," Swan argues.
Over at Suncorp, then managing director John Mulcahy travelled to Edinburgh in September for an investor conference. Management at Queensland's bank-insurance giant had been unsure about going but decided they needed to demonstrate confidence.
While there, UK institutions got shakier.
"It was surreal," Mulcahy recalls. "It was like, my goodness, what's happening in the world."
He regards the guarantee as imperative.
"No one had seen the collapses that were occurring at the rate they were occurring. No one understood the connectivity of the whole system," he says.
Guarantees were sliding down like shields across other nations and something was expected Down Under.
But people still withdrew money; Mulcahy says it got "very close" to a bank run. That's the horrible image of people lining up outside the bank door, desperate to withdraw funds.
One cooler bank customer at the time was Jon Kalkman, a retired principal living in Brisbane's Runcorn. He had shares, but also kept funds in savings and term deposit accounts.
He's with the non-profit Australian Investors Association, and thought local banks were safer than US cousins, having a clear distinction between investment banking and everyday deposit-taking operations.
"The guarantee was necessary, not financially, but politically," Kalkman says. "It was necessary … to be seen to do something to calm the fears, to restore confidence in the banks."
Banking sources are divided but some think the Australian Prudential Regulatory Authority could have potentially forced mergers if things looked perilous for an institution, meaning the institutions lost control of how to combine. Concerns surrounded whether liquidity fears could devastate smaller players triggering up the sector in a nasty a domino effect.
Bankers were intensely busy - a Suncorp source recalls seeing a tired Mulcahy with dark patches around the eyes.
Mulcahy describes the time as stressful.
"When you're in the middle of it you understand the downside implications," he says.
"People are debating whether there should or shouldn't be a banking guarantee, and you fully understand that without it, the banking system could collapse."
Suncorp had more on its plate. Investors fretted about bad debts (which later exploded) and its exposure to wholesale funding markets.
In fact, the day of the guarantee, Suncorp rejected a proposal to sell the bank to ANZ, although some say the deal was not attractive enough, rather than the guarantee itself being basis for rejection.
It can be revealed that one concern at Suncorp was that if a severe crisis suddenly had erupted, then the whole company, including the insurance arm, could have been sold. That was because the bank then was the holding company, and concern was there would be inadequate time to carve out the sale of the bank alone, if a merger rapidly was needed.
But Swan, for one, rejects suggestions the guarantee was designed for Suncorp, maintaining it was a system-wide buffer. "It was absolutely essential," he says.
Mulcahy and Suncorp's board later came under fire for their pre-GFC strategy. But Mulcahy rebuffs suggestions Suncorp had sown its own doom in the lead-up by expanding lending by tapping into large amounts of wholesale funds.
The bank had traditionally used such markets and Suncorp was not out of kilter with players globally, he argues. "The reality was banks around the world had problems," he says.
He points out that failures occurred overseas, even where guarantees were in place, unlike Australia.
Once the guarantee came in, nerves calmed.
"Generally deposits are continuing to flow into the smaller (banking institutions)," said one APRA email from December 2008, obtained by Freedom of Information laws.
Still, the move faced gripes - about funds evaporating from non-banking institutions, and smaller banks paying more for guarantees.
Swan now says criticisms are "a legitimate debate". But he would not have executed the program differently, arguing it needed to swift and comprehensive introduction.
The economy was facing its biggest threat since the 1930s, he says. "You get most of it right," he argues.
Mulcahy says the situation showed the importance of liquidity - the funding, or oxygen, for banks, which is a different animal to solvency.
"When the population loses confidence on a global basis that's what causes significant problems," he says.
"When people start taking their money and put it under the bed, then you've got a real problem."
- APRA chairman Wayne Byres dismisses 'bad apples' defence
- APRA releases Monthly Banking Statistics for February 2015
- APRA thinking hard on financial system inquiry bank recommendations
- Australian Prudential Regulation Authority Monthly Banking Statistics December 2014
- Australian Prudential Regulation Authority Monthly Banking Statistics November 2014