The Rudd Government has been forced to amend its unqualified promise to underwrite all bank deposits and is considering requiring those with accounts holding $1 million and more to pay a premium for the taxpayer-backed guarantee.
Prime Minister Kevin Rudd revealed the planned changes yesterday after being accused of not consulting the Reserve Bank before announcing 10 days ago the uncapped guarantee, which has since created problems within the financial system.
And, in an extraordinary attack, the Opposition Leader, Malcolm Turnbull, dared Mr Rudd to sack the Treasury secretary, Ken Henry, if it transpired he had misled cabinet by not warning of alleged Reserve Bank concerns before the guarantee was announced.
Mr Rudd branded this the most irresponsible thing he had heard Mr Turnbull say and demanded he declare his full support for Mr Henry.
"The world confronts a global financial crisis. The secretary of the Treasury is integral to this Government's and the preceding government's response to international economic developments," he said.
Also yesterday, Westpac became the last of the big banks to pass on the rest of this month's 1 percentage point interest rate cut. St George also cut its rate yesterday, taking it and Westpac's standard variable rate to 8.36pc.
Ten days ago, Mr Rudd scrapped plans to guarantee all bank deposits up to $20,000 and announced there would be no cap. The measure was designed to stop people who were panicked by the global crisis withdrawing their money and opting for stronger banks.
Branches of foreign banks, which can take deposits only of more than $250,000, were excluded from the guarantee.
They have complained that, in leaving them out, the Government has created a two-tier system.
Some big-money investors have started to shift deposits in foreign banks, which have total liabilities of about $280 billion, to banks or building societies the Government backs.
It has caused problems in the short-term money market.
When Mr Rudd announced the uncapped deposit guarantee, he said it had been approved by the regulators, including the Reserve Bank governor, Glenn Stevens.
Yesterday he rejected reports that Mr Stevens had warned of the adverse consequences but was ignored.
Mr Rudd told Parliament that during an emergency meeting on the weekend before last, he consulted Mr Henry before approving the guarantee scheme.
Mr Henry is head of the Council of Economic Regulators, which includes Mr Stevens, and he vouched on behalf of all members that they supported the uncapped scheme.
"The Government, in taking the decision that it announced Sunday a week ago, did so on the advice of the secretary of the Treasury that this was the position of the regulators, including the Reserve Bank," he said.
Concerns with foreign bank branches arose later and the Treasurer, Wayne Swan, had alluded to them last week. The option to charge premiums on accounts of $1 million was well advanced, Mr Rudd said.
Mr Turnbull said Mr Rudd's integrity had been damaged by the admission that he did not speak directly to Mr Stevens before announcing the guarantee when he gave the impression he had.
Yesterday Mr Stevens backed the guarantee of bank deposits.
"Steps in these directions, in the context of what other countries were doing, were sensible and the Reserve Bank supported them," he said.
He conceded the bank had concerns about the details and was working to help iron them out.
"It is ultimately the Government's call but we are giving them all the assistance we can."
Mr Stevens called on governments to co-operate internationally to make their guarantees more consistent.
The chief executive of the National Australia Bank, John Stewart, said he was awaiting clarification from the Government about changes to the guarantee.
Email a friend