Questions are still being raised over the risk associated with the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 (FSLA) that was put in place to ensure the Australian Prudential Regulation Authority (APRA) has the power to step in and either take over the operation of a bank in crisis or wind it up.
Is your money at risk in the bank?
The risk associated with individual and small-business deposits have been put under the microscope by the Citizen Electoral Council (CEC). The risk that is being highlighted is that APRA and banks can potentially use the Bail In laws enacted under the FSLA to seize individuals deposits to ensure the bank, or financial system, doesn’t fail.
In New Zealand, Canada, and the USA the Bail In law is clear that deposits can be used as part of the Bail In procedure. In Australia it has not be explicitly excluded.
‘Currently there is an estimated $2.8T in deposits of which over 80 per cent is concentrated in the big four banks,’ said Patricia Warren from Brunswick Heads.
‘Deposits have always been unsecured loans to a financial institution and the depositor has always taken the risk about getting their money back. The government is refusing to amend the legislation to give that critical legal protection.’
There have been various assurances from the Reserve Bank and other financial institutions that people’s deposits can’t be used to sore up a bank under the legislation. However, Ms Warren believes that, ‘FSLA fails to protect deposits because it does not explicitly exclude them from being used to “Bail In” a failing financial institution. Deposits can be converted into shares in a failing institution and then written down or off,’ she said.
‘Australia is part of a global financial system. In a financial crisis it is unlikely that central banks would be willing to “save” deposits if it meant shoring up the global system or any part of it. Deposits would be merely collateral damage.
‘Bail In in Australia is not new. It was used in the 1892/83 depression in Melbourne to shore up the banks. Some banks failed and it took 25 years for surviving depositors to get their money back.’
It has been implied that the Financial Claims Scheme (FCS) potentially covers loss of deposits in a bank up to $250,000. However, Ms Waren says this can’t be relied on.
‘The FCS is not funded and doesn’t address multiple financial failures as was threatened in 2008 when the big four banks faced defaulting.’
Ms Warren is encouraging people to take the opportunity to support the Banking System Reform (Separation of Banks) Bill 2019, which she believes will ensure individual deposits are more secure.
Submissions can be sent to [email protected] or mail to the Senate Standing Committee on Economics, PO Box 6100 Canberra ACT 2600, by 12 April 2019.