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Deposit guarantee scheme keeping rates high

by Staff Reporter8 minute read
The Adviser

The government’s deposit guarantee scheme is distorting financial markets, keeping interest rates on deposits higher than they should be, according to Commonwealth Bank chairman John Schubert.

Speaking at a business lunch, Mr Schubert said the big banks had not asked for the guarantee and a transition out of it should to be thought through as soon as possible, The Australian reported today.

In order to attract deposits the Commonwealth Bank had to compete with second-tier banks’ eight per cent plus interest rates, Mr Schubert said, which was pushing up internal funding costs.

“Interest rates are higher than they would be otherwise,” he said.

Mr Schubert called for the guarantee to be capped at a lower level to ease the “dysfunctional behaviour” in the market.

The deposit guarantee scheme has been the subject of ongoing concern since its inception, largely due to the negative impact on institutions not included in the initiative.

Published: 06-11-08

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