Frozen mortgage and income funds will be encouraged to apply for regulation as deposit-taking institutions in a move that Australia's Labor government may hope will take some heat out of the current controversy over inaccessible savings, but won't.The scope of the government's political problem from the fund freeze is also cloudy, given that a reasonable percentage of the invested funds are wholesale (and often superannuation) investments.The government's latest idea on responding to the fund freeze seems to be that funds can convert to banks and then enjoy the benefits of the government guarantee.The Prime Minister, Kevin Rudd, last night announced that Australian Prudential Regulation Authority will receive additional funding from the government to review applications.Not that APRA will be getting many.From a standing start, the time in which any managed fund that's not already part of a banking group and has not previously made this part of their business plan is likely to qualify for ADI status is less than two years.Few "new" banks manage to get off the ground in Australia. Members Equity Bank was one, and that required the guidance and capital support of Axa, along with the industry superannuation funds that sponsored it, to get off the ground. Elders Rural Bank is effectively a spinoff from Bendigo Bank, though also built on the kernel of the financial services business of rural supplier Futuris.The only credit union to get going in the last 20 years was Traditional Credit Union and it remains tiny. Probably no new building society has managed to achieve registration since the 1970s.Frozen managed funds that are owned by banking groups - such as the Colonial funds frozen on Monday - are unlikely to be interested, and nor are the mostly small or commercial mortgage funds, which would not have the systems, management or inclination to become an ADI.The Australian reported today that of $2.1 billion in mortgage and income funds frozen by Axa Asia Pacific, $1.4 billion was wholesale money and most of that super.Perpetual also said about half of its frozen funds of $1.6 billion are also wholesale.The Financial Review reported that the federal government was leaning on banks to provide liquidity to frozen mortgage funds, perhaps by investing directly in the funds.The newspaper also reported suggestions from the government to banks that they deliberately lower the interest rates paid on their liabilities, including retail deposits, in order to stem the flight from market-linked investments.The AFR did not quote any government officials in connection with this suggestion.Meanwhile in New Zealand Axa also pre-emptively imposed a freeze on its mortgage funds in that market, with Axa complaining over the design of that country's opt-in scheme for deposit insurance that covers finance companies but not funds.