Government considers $1 million cap for deposit guarantees

The Federal Government is considering imposing a $1 million cap on its $700 billion deposit guarantee plan after warnings the plan will spark a flood out of some financial vehicles into bank deposits.

The Federal Government is considering imposing a $1 million cap on its $700 billion deposit guarantee plan after warnings the plan will spark a flood out of some financial vehicles into bank deposits.

Treasurer Wayne Swan says the Government is considering changes to the plan, with deposits of more than $1 million attracting a small insurance premium.

“It will be done in a thorough, measured and considered way. What our regulators are doing is settling all those details and consulting with industry,” he said today.

The plan’s announcement has seen a flood of withdrawals from mortgage funds not covered by the guarantee, leading several firms to freeze their funds.

Challenger Financial’s Howard Mortgage Fund, the nation’s largest, has frozen withdrawals, while The East Coast Mortgage Trust, Northern Investment Trust Fund and Richmond Mortgage Fund have followed suit. The three funds together are worth $660 million.

The heads of several investment firms sent a joint letter to the Government last Friday warning the deposit guarantee would see a rush of withdrawals. Cash management representatives will meet with government officials today to discuss broadening the guarantee.

After much grilling from the Opposition, the Government has confirmed the RBA supported the deposit guarantee before its announcement.

Treasury Secretary Ken Henry told Parliament today he rejects claims RBA Governor Glenn Stevens had concerns about the deposit plan.

“I tendered the advice to the Government, and the Governor and I were of one mind in respect of that advice,” Henry says.