The $1 million cap on government bank deposit guarantee will not lapse in October 2011 as initially planned, but a new permanent ceiling will take effect in February 2012. The new cap will be down to $250,000 per person.

Despite the new ceiling being only 25 per cent of the $1 million guarantee which was introduced only as an emergency measure to protect smaller banks from the global financial crisis that hit world markets in 2008, Treasurer Wayne Swan said on Sunday that Australians still enjoy one of the highest deposit protection schemes in developed nations.

The lower cap is expected to still provide protection for 99 per cent of deposits in Australian banks, building societies and credit unions, Mr Swan pointed out.

In February 2010, Mr Swan removed the guarantee for deposits over $1 million beginning end of March that year after bank borrowing costs returned to normal levels.

He then warned the banks not to use the withdrawal of the guarantee for deposits beyond $1 million to hit borrowers with higher interest rates.

Even if the federal government would lower the cap to $100,000, it would still provide cover to 97 per cent of accounts by number and 65 per cent by value, according to a Treasury consultation released in May.

At $250,000 the ceiling guarantee is less than the U.S. deposit guarantee of $288,000 but twice that of Canada's and Japan's, and higher that Britain's $167,000 cap.

The Treasury lowered the ceiling upon the advice of the Council of Financial Regulators, whose committee members include the governor of the Reserve Bank of Australia, the Treasury secretary and the Australian Prudential Regulation Authority chairman.

The $1 million guarantee was expected to end in October 2011, but Mr Swan announced that it would be extended for existing deposits until December 31, 2012, after which the $250,000 ceiling would prevail.

The new cap will not apply to deposits in branches of Australian banks overseas, but applies to deposits held by foreign banks which have an Australian banking license.

"The combination of healthy, profitable banks and strong prudential regulation is the best guarantee we have that our money is safe in the bank," Australian Bankers Association Chief Executive Steven Munchenberg told The Sydney Morning Herald.