Guarantee removal a "significant milestone"

But one analyst said that if banks' funding costs are adversely impacted by the decision in the future, it would result in tighter financial conditions and limit the Reserve Bank of Australia's (RBA) need to lift the official cash rate.

Treasurer Wayne Swan announced that the wholesale funding guarantee, along with the guarantee for deposits over $1 million, would end on March 31.

The Financial Claims Scheme, which is a free guarantee for deposits up to $1 million, will continue until October 2011, and provide certainty for 16 million Australians over their bank deposits.

Mr Swan told parliament in a ministerial statement on Monday the removal of the guarantees represented a "significant milestone" for Australia's banking system in pushing past the worst of the financial crisis.

The wholesale funding guarantee had been central to Australia's response to the global crisis, and allowed banks to raise more than $160 billion on international markets.

"This meant they could keep lending to Australian businesses and households, providing vital support for jobs and growth," he said.

"Without the guarantee, our banks would have lent less and interest rates for borrowers would have been higher."

The guarantee allowed non-major Australian banks to raise more than $32 billion in funding from international markets.

He said the Council of Financial Regulators - which includes the RBA and Treasury - had considered that bank funding conditions had improved and that the guarantee was no longer needed.

The proportion of non-guaranteed issuance by Australian banks had increased from less than two per cent at the start of 2009 to 98 per cent in January 2010.

"Critically, our regulators have explicitly advised that removing the guarantee will not materially affect banking sector funding costs," he said.

So far that judgment has a nod of approval with major bank shares rising on Monday, led by a near three per cent jump in Westpac shares.

ANZ senior interest rate strategist Tony Morriss said the decision to axe the guarantee was not a surprise, although the timing and phased nature of the expiry does provide some challenges.

"If there is any sign that bank wholesale funding costs are being adversely impacted, even if temporarily, then this means an effective tightening of financial conditions," Mr Morriss said.

"At the margin this would mean the RBA would have less to do on cash rate."

But Mr Swan reiterated there is no justification for any bank to raise interest rates beyond future RBA movements for any reason at all, including the removal of the guarantee.

Opposition treasury spokesman Joe Hockey said the treasurer must insure there is not a last minute rush by banks to "gorge themselves" on the government guarantee before the deadline.

"The use of the guarantee by the banks is a contingent liability of the commonwealth," he told parliament in response to the treasurer's statement.

He also said the treasurer should address concerns of some smaller banks, such as the Bank of Queensland, that they will not be able to raise money at an affordable rate on the markets.