Australia's big four banks are lobbying to change the Government's bank guarantees, warning they potentially increase risk and could result in higher interest rates.
The banks want to water down the deposit guarantee and shorten its three-year duration, arguing it has artificially elevated the position of second-tier institutions and allowed them to increase deposit rates to unsustainable levels.
Credit unions, building societies, and smaller banks currently offer deposit interest rates up to 1.25percentage points higher than the major banks, industry monitor Cannex says.
Australian Bankers' Association chief executive David Bell said yesterday the deposit guarantee needed to be reviewed ''sooner rather than later''.
''I think the growing view is that when markets do stabilise at that time there should be a serious review as to whether these guarantees remain in place going forward, and if they do to what extent they are in place,'' he said.
A key concern of the banks is that a number of second-tier institutions will grow to rely on the guarantee.
Mr Bell said that there was ''broad acceptance'' of the guarantee to begin with, but that institutions would need to ''get off the drip''.
The peak body representing building societies and credit unions fired back at the banks accusing them of making ''self-serving'' comments.
Abacus chief executive Louise Petchler said, ''The big banks want the guarantee amended to suit them and deliver them market dominance.
''But unfortunately for them, we'll be here in the decades ahead, guarantee or no guarantee, offering a member-owned alternative.''
Treasurer Wayne Swan defended the bank deposit guarantee, saying that the ''rough edges'' could be worked out over time.
''In such situations, the only responsible course of action is to act quickly and decisively, and smooth over any rough edges in the process of implementation,'' Mr Swan told the Australia-Israel Chamber of Commerce in Sydney yesterday.
''But I'd note that everyone who comments is quick to say they accept the guarantee was necessary to maintaining the stability of our financial system.''
Opposition Leader Malcolm Turnbull said that the Government had bungled the guarantee, but was left red-faced after predicting wrongly a Government backflip late yesterday on legislating a wholesale funding guarantee.