Question

In the face of the global financial crisis, Kevin Rudd introduced government guarantees on deposits.

Discuss covering at least the following two parts:

1. An introduction/summary of the Government Guarantee.

2. The general impact of this policy to the efficient frontier based on the Australian environment.

(1 paragraph on each part) (2 + 2 = 4 marks)

Answer 1

Introduction/ Summary of the Government Guarantee

It refers to the Financial Claims Scheme (FCS) which provides protection to depositors of up to $250,000 per account-holder per authorised deposit-taking institution (ADI) (bank, building society or credit union) in the event of the ADI failing for 3 years. . This measure was taken when there was a global financial crisis in 2008.It aims to protect the depositor's money incase the bank falls. When bank fails, the FCS is activated under the Australian Government.  Once activated, the FCS will be administered by APRA. In an FCS scenario, APRA (Australian Prudential Regulation Authority)would aim to pay the majority of customers their protected deposits under the Scheme within seven calendar days.he FCS limit of $250,000 applies to the sum of an account holder’s deposits under the one banking license. Therefore, all deposits held by an account holder with a single banking institution must be added together towards the $250,000 FCS limit, and this includes accounts with any other banking businesses that the licenced banking institution may operate under a different trading name.

The efficient frontier is the set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return.When Global crisis occured, the prices of portfolios also came down. When Kevin Rudd introduced government guarantee scheme , the market came up with positive results as the depositors will not loose any money. The market was unstable due to global crisis. It was worst affected. The DWFG (Deposit and Wholesale Funding Guarantees)scheme guaranteed Australian banks’ retail deposits and wholesale funding in case of insolvency and so limited the possibility of a bank run. It was hoped that this would help banks continue their business as usual, avoiding any temporary financial difficulties caused by the crisis.Through this, the market risk was lowereb therby stabilizing the market.