The federal government is finally withdrawing its guarantees to banks and the state governments that allowed both groups to have a good credit crunch and recession, despite the best attempts of some commentators to whip up the odd crisis along the way.

The guarantees were dramatic when revealed on October 12, 2008, a month after Lehman Brothers collapsed, triggering a chain reaction of credit crunches around the world, on top of the already extensive reduction in global liquidity, which started in August, 2007.

Using the country’s AAA rating to protect our banks at the height of the credit crunch in October 2008, the system of guarantees provided funding and deposit certainty, they certainly worked and is now being withdrawn. Similar arrangements supporting borrowing by the states are also being wound down.

Some criticised the support for the banks, such as Peter Swan of NSW University. Others questioned its removal, such as Jennifer Hewitt, The Australian’s national affairs reporter, who said it was a strange time to remove it when there’s renewed doubts about sovereign risk.

But not our risk, which is low given that our national debt and Budget deficit are the lowest in the developed world and have already started falling.

Swan’s criticisms are at least constant, but he neglects to point out that when Australia was cut off from the rest of the world in the last quarter of 2008, how the Reserve Bank funded the Australian financial and banking system with more than $45 billion in deals (re-purchase agreements and allowing banks to hold higher than normal balances in their accounts at the central bank and a special deposit).

These measures, plus the guarantees, kept the banks alive, especially Macquarie, which was under attack from hedge funds and other speculators; helped Suncorp’s Metway subsidiary in Brisbane, plus the Bank of Queensland and the Bank of Bendigo. Smaller lenders were also helped by the guarantees. The deposits guarantees helped stop any runs that might have developed in the wake of collapses in the UK, US and Europe. The most damaging type of run wasn’t where people queued outside a bank of a lender, it was where the money was taken out electronically through internet banking and in the wholesale markets.

That’s how US banks such as Bear Stearns, Lehman, Washington Mutual, Wachovia and IndyMac were crippled and then fatally wounded.

Treasurer Wayne Swan said that Australian banks and other lenders have so far paid about $1.1 billion for the use of the guarantee and will pay about $5.5 billion over its full life, so it’s been a nice earner for the country.

But the biggest beneficiaries have been the banks and their bankers. The Big Four have tightened their grip on the economy and on the sector. They account for more than 90% of lending for housing and all four have been allowed to expand their grip on funds management (and ignoring the inherent conflict of interest).

Many bankers have kept their jobs, only some of their dud clients, such as ABC Learning, Allco and MFS etc went bust. The arguments here over bank pay and bonuses have not been as damaging in the US and thanks to the guarantees, all institutions kept their credit ratings and as those of their peers offshore tumbled. Our banks (especially the Big Four, all AA rated), looked increasingly better and their CEOs and chairmen, increasingly smug.

Australia’s hard-earned AAA rating was the best support of all.

Macquarie was the most exposed before the guarantees started. It used the backing of the guarantees to raise enough money to reassure its creditors and partners that it would remain in business and allowed it to calmly change its business model to a less contentious one and one also less exposed to the stockmarket.

It was given the time and certainty to rebuild that model, getting rid of its satellite fund groups (Macquarie Media, Macquarie Airports etc) and unwanted business, such as property lending in Australia and Italy, and to move deeper into funds management in the US and Europe. Macquarie in effect has recast itself, and could have only done so at its pace with the guarantees in place. Without the guarantees, its shares would have been attacked continuously and management would have had to defend the company rather than redesign it.

Suncorp got time to restructure its Metway banking business (and its own troubled insurance operations), raise money and not sell itself to the ANZ Bank, as was rumoured in October 2008, when the guarantees were introduced. The company changed CEOs and found someone who understood insurance and understood the need for providing market certainty. The bottom line is that Suncorp was allowed to remain independent by the guarantees.

The Commonwealth Bank bought Bank West cheaply (but had to inject more money to repair the damage done by imprudent property lending). Its own lending policies (ABC Learning and Centro, for example), had caused market worries to rise. The guarantees backstopped its huge balance sheet and the acquisition of Bank West. The CBA had bough a third of Aussie Home Loans two months before the guarantees were introduced.

Westpac, which is said to have been the biggest using of the funding guarantees, used them to support and backstop its takeover (sorry, merger) of St George and turn itself into a near giant and rival to the CBA in home lending.

The ANZ Bank was also backstopped by the guarantees and new CEO Mike Smith struggled to rebuild its name and market confidence after the Tricom and Opes Prime funding debacles. Having the guarantees in place also helped Smith and his new management group assure the market that his Asian expansion plan (the third from the ANZ in 30 years) was well thought out and would be done cheaply, buying up solid assets from distressed banks. The ANZ also had some dodgy American monoline insurer assets in its balance sheet that went bad for a while (to the tune of hundreds of millions of dollars)

And the NAB had to have the guarantees in place because it had some unfortunate subprime related rubbish in an off balance sheet vehicle called an SIV that no one new very much about. The NAB had also bought a small rural bank in the US called Great Western, which made investors nervous (any US bank was automatically bad news in 2008). The NAB was also exposed to the tanking UK banking and property markets. A new CEO and management team has leveraged off the stability brought by the guarantees to go deeper into insurance and funds management (Aviva and the present bid for AXA Australian business).

Smaller banks, such as The Bank of Queensland and The Bank of Bendigo moaned about the fees they paid (they wanted equality with the higher-rated bigger banks), but they were allowed to remain independent and stay in business by the support from taxpayers.

Treasurer Swan claimed in his statement that without the guarantee, our banks would have lent less and interest rates for borrowers would have been higher, leading to lower growth and higher unemployment.

“The guarantee has also been vital in helping to support competition in the banking sector throughout the global financial crisis, which hit smaller lenders particularly hard.

“It has offered wholesale funding certainty to more than 150 Australian Authorised Deposit-taking Institutions, including regional banks, building societies and credit unions. The guarantee has allowed non-major Australian banks to raise more than $32 billion in funding from international credit markets. Together with the Government’s direct investment of up to $16 billion in the RMBS market, this has helped smaller lenders to continue lending at competitive interest rates and competing with the big banks.”

I can see his point about competition, but the reality is that we now have fewer banks operating in this market.