The deposit guarantee came into operation yesterday. There is no cap on the size of deposits to be protected.

The Government will also guarantee all term wholesale funding by Australian banks and deposit-taking financial institutions operating in international credit markets.

This is intended to help Australian institutions to raise funds overseas in the current extremely tight market and will restore confidence in credit markets.

The Government will charge financial institutions for providing the guarantee and will withdraw the facility once market conditions have ''normalised''. In effect the Government will insure the eligible liabilities of Australian financial institutions.

Mr Rudd said the charge for the guarantee ''will be levied at an appropriate rate determined between Treasury and [the banks and financial institutions], which will go to ensure that this is not simply a free gift from the Government by way of a guarantee to the banks''.

Mr Rudd also announced the Government would direct the Australian Office of Financial Management to buy an extra $4 billion in residential mortgage-backed securities. This is in addition to the $4billion of Government funds already committed to home lending and is intended to ensure the Australian mortgage market has access to sufficient funds.

The Government's announcements follow crisis talks at the weekend between the Prime Minister, senior ministers and officials.

The decision to guarantee all bank deposits for three years brings Australia into closer alignment with other countries that have recently established their own bank deposit guarantees as part of efforts to combat the deepening global financial crisis.

Earlier in the day Treasurer Wayne Swan said Australia's banks and financial institutions remained sound and he did not expect the deposit guarantee to be called on.

''I don't expect we'll need to put those [arrangements] into effect at all ... I certainly don't expect that.''

The Prime Minister also emphasised the resilience of Australia's financial institutions but said the additional measures he was announcing were necessary to ensure the sector remained internationally competitive.

The announcements followed several days of speculation that the Government would increase the scope of deposit protection which the Government proposed last week to extend to a maximum of $20,000 in part to ensure Australia's banks remained internationally competitive. ''Australian banks, despite the fact that their balance sheets are in excellent shape, now have to compete with these foreign banks for funding on global financial markets, foreign banks which despite their weaker balance sheets now have the advantage of a Government guarantee'', Mr Rudd said.