Sydney, 9  September, 2008: The Australian Bankers’ Association (ABA) says the US Government’s taxpayer bailout of the nation’s two biggest mortgage companies helps demonstrate the value of Australia’s banking sector’s strength.

The bailout of mortgage companies Fannie Mae and Freddie Mac is estimated to cost US taxpayers up to $AUD123 billion¹. This is the second major US taxpayer bailout in twenty years, the other resulting from the US Savings and Loans crisis in the 1980s. This earlier crisis was caused, in part, from moral hazard² associated with US deposit insurance.

David Bell, Chief Executive of the ABA, said: “In contrast to the US, except for failed government-owned banks, no Australian taxpayer dollar³ has supported a private Australian bank since the 1890s.⁴”

Apart from protecting taxpayers and depositors, banks have been critical to underpinning growth and investment during tough times. In the late 1990s Asian financial crisis, those Asian economies with weak banks were crippled, leading in a number of cases, to economic dislocation and unemployment. Whereas, Australian banks continued to provide business and household loans, and safely accepted deposits.

Even in the current credit crisis, where Australia is, in one sense, more exposed than many other countries due to our heavy reliance on international funds, the strong credit ratings of our banks have ensured banks have maintained credit availability.

Of course, this historical and continuing performance of strength and contribution is ignored by some critics who seek to advise banks on how best to operate, without properly understanding how complex and demanding it is to run a financial institution.

ENDS

[1] The US Treasury can purchase up to $US100 billion ($AUD123 billion) of a special class of stock in each company as needed to maintain a positive net worth. It will also provide secured short-term funding to Fannie Mae and Freddie Mac and purchase mortgage-backed debt in the open market. 
[2] For this reason, ABA opposes the Government’s recent announcement to insure Australian deposits up to a value of $20,000.
[3] In 1931, the Government-owned Commonwealth Bank provided a small loan to the Primary Producers Bank of Australia in anticipation that this bank was going to experience a run. However, the ABA understands that no taxpayers’ money was lost, though depositors lost 1.25% in the dollar of their deposits.
[4] The ABA is unsure whether taxpayers’ money was used to support banks or depositors in the 1890s depression. Our hypothesis is that taxpayer money was not spent but this is an area of ongoing analysis.