The deposit guarantee scheme for deposits in banks, building societies and credit unions and other ADI's announced by the Government on 12 October has been changed.

The Treasurer announced on 24 October that the Government has decided that a threshold of $1 million be implemented, over which a fee will be charged to financial institutions to receive the benefits of the deposit guarantee. (Treasury details: Australian Government's 2008 Deposit and Wholesale Funding Guarantees)

Fee Structure and level for the guarantees
Fees will be set at a single rate for all maturities for eligible securities up to 60 months, with a different rate applying to eligible ADIs based on their credit rating.  The fees will apply to the wholesale guarantee and to the guarantee for deposits above the $1 million threshold.  The fees will be levied annually.

Credit Rating	Debt Issues Up to 60 Months
AA	70bp
A	100bp
BBB and Unrated	150bp

 The fee will apply from 28 November 2008. Up until that date all deposits and wholesale funding eligible for the guarantee arrangements will be guaranteed without charge. After that date, deposits over $1 million and wholesale funding will only be guaranteed if the relevant fee is paid.

Administration of the guarantees
The Reserve Bank of Australia (RBA) will administer the guarantees as agent for the Commonwealth. The RBA will perform administrative tasks, including processing applications from institutions for coverage of liabilities and collecting fees.

The RBA will consult with APRA to ensure that the interests of the Commonwealth are protected.

The legal framework for the scheme will be deeds entered into by the Commonwealth and the participating institutions. The deeds will refer to scheme Rules that will be published by the Commonwealth.

The Government will provide six monthly reports to Parliament on the scheme operations.

Wholesale funding guarantee
Eligible ADIs must apply to the RBA for coverage of theirliabilities. Eligible ADIs will be required to meet set criteria specified in Rules before they receive coverage. The Rules will be released in the near future.

Deposit guarantee over the threshold
Eligible ADIs will apply to the RBA for coverage of their deposits over the $1 million threshold.

Eligible ADIs would choose whether to 'opt in' to the guarantee for their deposits above the threshold. If an eligible ADI opts in, it would be up to the ADI to determine the most suitable arrangements with its customers for those deposits it wishes to offer on a guaranteed basis

Depending on the arrangement chosen by the ADI, depositors may need to indicate to the ADI whether they wish to receive the benefit of the guarantee for amounts over $1 million.

If an ADI agrees to opt in, they would be required to pay the relevant fee to the RBA.

The fee would be payable on the value of the depositor's account(s) over the fee threshold.

It is expected that the ADI will pass on the costs of the guarantee to depositors either in the form of a fee or a reduced interest rate.

Legislation links
The Financial Claims Scheme legislation package has been passed and assented to:

• Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Act 2008
• Financial Claims Scheme (ADIs) Levy Act 2008
• Financial Claims Scheme (General Insurers) Levy Act 2008

Bonus link: Time article, Bad Times for Banks Mean Boom Times for Credit Unions