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today yes but what about deposit insurance [Music] again it's Martin north from digital finance analytics what was his post covering finance and Prabhu's with a distinctively Australian flavour couple of days ago I did quite a long post on deposit bail and it got quite a lot of response from our viewers and thank you for your comments but one of the questions that I got asked a lot was how does bail in interact with the deposit insurance which does exist in Australia but not yet in New Zealand so today I wanted to explore the deposit insurance conversation a little further before I start I need to make one thing clear this is my opinion it'll be based on information that's publicly available but it's not legal advice so please don't take it as that the second point to make is that whilst the bail in initiatives are designed to deal with a failing bank and perhaps not allowing it to fail simply because you grab deposits and converted into capital then that means the banks can continue the Deposit Insurance Scheme only comes into play when a bank has failed so there's a bit of a double jeopardy here insofar that if a government saw that the bank was likely to fail they might choose to activate the bail in strategies before the bank fails thus avoiding the Deposit Guarantee which in Australia certainly they will be liable for now of course people don't want to talk about that but the fact is there is definitely a situation where you could see government's pushing for deposit bail in rather than Deposit Guarantee anyway let's assume that a bank has failed and that you have money with the bank so the question is in the current environment in Australia first what are the terms or conditions of that deposit guarantee who is covered and how much is covered and the good news is there is a lot of information to share on that all publicly available and that's what I'm going to do now to start with I got a look at the assic money smart website this is one of the most important sites for consumer finance in Australia and I think as it has done a pretty good job it's quite did to navigate in places but nevertheless there's some really good information it's one of the sites that I recommend almost more than others to people who ask me questions and if you get down through the site you can see that there is actually a section on the government guarantee of deposits in Australia and it says that the Australian government will guarantee deposits up to two hundred and fifty thousand dollars in authorised deposit-taking institutions ADIZ or banks such as your bank Building Society or credit union and that means they say that this money is guaranteed if anything happens to that Bank but there is a cap the cap applies per person and per ABI if you have two hundred and fifty thousand dollars with one adi and $250,000 with another your deposits are guaranteed but if you have more than two hundred and fifty thousand dollars with 180 right then only up to two hundred and fifty thousand dollars is guaranteed and they make the point quite rightly that some ad eyes operate multiple brands and may offer deposit accounts under more than one brand name however they're all part of the same adi and that means that the guarantee covers deposits per adi not per brand name for example if you have multiple deposit accounts with brands that are owned by the same adi the guarantee will only apply to $250,000 of those funds in total in the case of joint accounts each account holder is entitled to an individual guarantee of up to $250,000 and the guarantee applies to all adi is incorporated in australia including australian owned banks foreign subsidiary banks building societies and credit unions and we'll go through the banks currently on the lists in a few moment and they also go into some detail with regard to the types of accounts covered by the guarantee well again we'll go into this in more detail and this includes same as accounts call accounts term deposits current accounts check accounts debit card accounts transaction accounts personal basic accounts cash management accounts farm management deposits pensioner deeming accounts mortgage offset accounts I 100% or partial offset that our separate deposit accounts trustee accounts and retirement savings accounts and the last thing they talk about is the seal and they say that if you see this seal as represented here on brochures or letters relating to your account you'll know that the account is covered by the guarantee but of course they say this is an example only you may see it in other colors and your financial institution does not have to use will display the seal if it chooses not to display it it doesn't mean your account is not guaranteed so that's a really good starting point to understand how these scheme works in Australia now to give some context to our discussion about the positive protection in Australia I wanted to refer to the RBA bulletin from 2011 an article authored by grant Turner and this has some very important information contained within it it's rather old but nevertheless it's very pertinent at the first point to make is that whilst there was a temporary $1,000,000 cap post the global financial crisis in 2012 the limit was set to a permanent basis of 250,000 dollars per person per Adi now this paper says that despite reduction in the cap it's estimated that the deposit guarantee will still cover around 99 percent of deposit accounts in full and about 50 percent of eligible deposits by value for household deposits the estimated proportion of the value of balance is covered is higher at around 80 percent [Music] and it goes on to say that the revisions to the scheme is consistent with developments internationally with a number of other governments having taken the decision to change their deposit insurance limits took more appropriate post-crisis level at $250,000 per person for adi the revised FCS cap is still at the higher end of the range of post-crisis deposit insurance caps relative to per capita GDP and here is the table that they published as part of that report with Australia close to the top it's also worth highlighting the fact that they call out the ex post and X and Z in other words is their funding before an event or is there a funding only after an event and in fact Australia is in a bit of a minority with the ex post arrangements and they also discussed the ex post method of funding FCS payments we in contrast to the ex anti approach which is more common other jurisdictions an ex anti approach involves charging depositing institutions fees for the provision of the Deposit Guarantee with the size of the fee typically determined either as a fixed proportion of at individuals institutions in short deposits or based on the institution's assess risks of failure the fees received from insured institutions are usually pulled into a special-purpose investment fund from which payments can be made in the event of a failure in principle they say this approach reduces the possibility that surviving institutions or taxpayers are burdened by shortfall from the liquidation of a failed institution's assets and the RBA said that while pre-funded schemes remain the most common around the world a number of countries other than Australia have chosen post funded arrangements including Austria Chile Luxembourg Italy the Netherlands Slovenia and Switzerland and that's partly because there is an opportunity cost relating to pre funding and also the question of run time to be able to capture sufficient funds into a deposit scheme prior to a bank failing however my own perspective is that this is the lowball route and the government should have activated a process whereby banks are levied ahead of time but once again it's the taxpayer who is picking up the tab now the quick point is that the Australian scheme operates as a so-called pay box scheme meaning that its sole purpose is to reimburse depositors in a failed Australian ADI some deposit insurance schemes and other jurisdictions have broader mandates which allow them to finance other Bank resolution options including the creation of a bridge bank and capitalization for example in Japan and Korea although APRA has these broader for resolution options available to it these functions are separate from the FCS and there's another point to make to payments of deposits covered on the FCS are initially financed by the government through a standing appropriation of 20 billion dollars per failed adi although they said it is possible that additional funds could be made available if needed subject to parliamentary approval the amount paid out under the FCS and expenses incurred by APRA in connection with the FCS would then be recovered via a priority claim of the government against the assets of the ADI in the liquidation process if the amount realized is insufficient the government can recover the shortfall through a levy on the ADI industry and finally another important aspect of the design of the FCS is that it is administered by Emperor a presidential supervisor provides it with the information necessary to determine whether or not the FCS needs to be activated this approach helps to limit the potential for costly additional monitoring of ADIS that may occur in a separately governed scheme and ensures that there is no coordination problems in the event the FCS is activated in contrast deposit insurance schemes in many other countries are separately governed corporations likely reflecting that the scheme administrators are effectively tasked with managing a special-purpose fund although in some cases regulatory authorities have representatives on the schemes board and it's worth highlighting once again that the deposit scheme would need to be activated by the government APRA essentially does the administration right now the next thing I'm going to do is to go across to the website because the APRA website has a whole series of pages on the financial claims at scheme and of course APRA is responsible for the administration of the scheme on behalf of the Australian government so they say that the Financial claims scheme covers banking institutions incorporated in Australia and authorized by APRA that are Australian banks foreign subsidiary banks building societies credit unions and other authorized deposit-taking institutions and we'll go to a full list in a moment but there are some exceptions the FCS does not apply to the following branches of foreign banks in Australia foreign branches of Australian banks located overseas and finance companies and other fine institutions that are not licensed to authorized by APRA and there is one area of complexity that they cover here they say some banks building societies and credit unions may operate multiple banking businesses with different trading names under the same banking license however under the FCS the deposit protection of twenty fifty thousand dollars applies per account holder to deposits under each banking license which includes deposits with any other banking business with different trading names that operate under a banking license therefore if you have deposit accounts where the bank buildings how to create Union and with any other banking business they operate with different trading names you need to add all these deposits together to calculate the amount that is covered under the FCS for that particular institution now on the same site we can look at the types of accounts covered under the financial claims that scheme and there's quite a long list here savings accounts call accounts term accounts current accounts check accounts debit card accounts transaction accounts personal basic accounts cash management accounts farm management deposit accounts pension and deme accounts mortgage offset accounts either 100% or partial offsets that are separate from deposit accounts and trustee accounts and retirement savings accounts but they also make it clear that there are some types of accounts that are not covered under the financial claim scheme the FCS does not apply to the following accounts accounts with funds that are not in Australian dollars accounts kept at foreign branches located overseas of Australian banks built-in starters and credit unions credit balances on credit card facilities or other loans prepaid card facilities or similar products and nostril accounts and Vostro accounts of foreign corporations that carry on banking business or otherwise provide financial services in a foreign country and they make the point that it is worth checking with your bank or Building Society or credit union as to whether the particular accounts are covered under the financial claims that scheme so now let's look at the list of authorized deposit-taking institutions covered under the Financial claims scheme and again we must stress it's up to a total value of $250,000 we cover that now and usually accounts are offered at under the name of the ADI but some adi offer accounts market under different names as we've already discussed and the list that I'm going to go through now was updated last on the 8th of May 2019 and of course there is always a chance that new players may be added later what others may be removed and of course even appre warns that they'll keep the list up to date as best they can but they cannot guarantee that it includes all the names that each ADR uses to rewrite accounts let's have a quick flick down through the list of Australian owned deposit institutions I'm not going to read the long list you'll be pleased to hear but you can see there that there are some of the newest players like 86400 Limited which is one of the new findex OMP Bank Australia New Zealand Banking Corporation ain't dead in other words and then you can go down the list one interesting one is Bendigo and Adelaide Bank because under one banking license they have a whole series of different brands from Adelaide Bank Bendigo Bank Circle Alliance Bank community sector banking etc etc and that's quite important to understand another example of that is if you look at CBA Bank West is under CBA because they are a subsidiary of Commonwealth Bank of Australia we'll jump down the list is a little bit more lots of credit unions of course quite a long list of smaller players greater Bank Limited heritage Bank Limited they used to be Credit Union but now our bank go down the list furthermore quarry banks there members equity bank and the National Australia Bank is worth highlighting that you Bank is a subsidiary of National Australia Bank Newcastle permanent more credit unions and we can get on the list towards Westpac no another example here Westpac Banking Corporation includes Bank of Melbourne Bank sa surge Bank so it's worth just thinking about those subsidiaries that are under a single banking license finally they also cover the foreign subsidiary banks that are under the scheme and that includes our bank Australia Limited Bank of China Australia Limited Bank of Sydney Limited Citigroup proprietary limited HSBC Bank Australia Limited ING Bank Australia Limited trading as ing and Rabobank Australia Limited for an important little caveat there at the bottom of the page that Bank of China Limited Citibank NA an ING Bank NV our branches of foreign banks are not covered by the Financial claims scheme and just to repeat ING Bank Australia Limited tradings ING is covered and the Bank of China Australia Limited is covered now one of the things that opera has on the website is a little journey that you can take to see whether your deposits are protected and this is meant to be a general guide but it's actually quite interesting so let's just start the questions do you have deposits with any bank institution covered under the FCS list on the website I'm going to say yes and then they basically tell you about the joint accounts and the banking licenses and the second question is do you have more than $250,000 with the same Bank Building Society or credit union I'm going to say no to that one and it concludes that deposits should be protected and of course if you two different answers then you'd go through a little bit of a different journey and they make the point about the $250,000 limit now there are also some frequently asked questions and it's worth going th
ough those because this really starts to get now into the operationalization of the financial claim scheme and the first comment that you need to be aware of is if the FCS is activated by the Australian government now let's just pause there this tells you something really really important at Pro is responsible for the administration of the scheme but the scheme if it is to be activated will be activated by the Australian government in other words currently the scheme whilst it exists on paper doesn't exist and it won't exist for any particular adi until the government deems that it is required to be activated now that's something which many people don't realize because they sort of assume that it is always there all of the time no the scheme will be activated by the government in a crisis when a bank has gone bust but it doesn't actually exist at the moment okay with that out of the way then it says that if the Financial claims scheme is activated by the Australian Government how would payment be made well payments could be by cheque electronic transfer or into an account at another financial institution the next question is when would payments be made and they're saying within seven calendar days perhaps although some times it may take a bit along with them that they mentioned the $250,000 limit again and it says that if the FCS is activated and my only account is with the failed Bank how will I be paid it's a good question in the unlikely event that the FCS is activated by the Australian government you would be able to elect to be either be paid your FCS entitlement into an alternative account details of which you'd provide or receive a check payments will only be made in Australian dollars and electronic payments will only be made to Australian banks building societies credit unions and then the final question is what is the liquidation process well liquidation is a process where an independent person knows liquidator winds up a company by selling all its assets and paying its debts or a portion of those debts we're full payment is not possible from the parousia to the sales the company's debts are paid in order of priority when the process has been completed the company will usually be registered and will cease to exist as a legal entity for example in the unlikely event that a bank building site or credit union incorporated in Australia fails and goes into liquidation any debts are paid out according to priority rules set out in Commonwealth legislation including other banking out under the legislation the proceeds from the sale of a failed bank excuse an asset will be distributed in the following order there may be exceptions but firstly firstly to APRA an amount equal to money paid by APRA to account holders protected under the FCS so what that says is that deposits that are protected has effectively first rights secondly to APRA for the costs incurred in exercising its powers to administer the FCS next to account holders in banks building societies incorporated in Australia not played out under the FCS such as in excess of $250,000 limits to the RBA to any debts owed to parties under an industry support contract certified under the Banking Act for the institution's liabilities to APRA for costs of the statutory management of the failed institution for other liabilities in the order of their priority asserted in the corporation's own so very important message here is this means that in the case of a liquidation of a bank building Society or credit union incorporated in Australia an account holder making a claim to recover an amount over the FCS limit of $200,000 would rank third in the order of priority listed above now that's a very important point because as we said there is a 250 thousand dollar limit and above that then you rank down the list so there you are a bit of a tour around the Deposit Guarantee processes in Australia let me just recap on three things firstly the scheme will only be activated when the government deems is necessary second opera will take administrative responsibility for the scheme and third there are limits on the amount that can be paid out based on the 2050 thousand dollar ceiling now there's a few other things to take note of firstly there is a 20 billion dollar cap per institution for each FCS scheme and for some large organizations you might find that not all deposits therefore would be covered secondly there are two types of deposit schemes around the world there is one type where essentially banks are putting money into a kitty ahead of time in case a bank fails but we don't have that here what we have is the scheme that I've described to you today doesn't exist until the government calls it into existence there are limits under the scheme and it's also true that it may well be that if there is a big LIBOR that he created under the scheme the government could then come back and knock on the door of other banks later to try and help cover the cost but he's post the event rather than pre the event and that is not the recommended way to handle Deposit Insurance around the world and the third point just to reiterate again this scheme is only in the case of a bank failure when deposits are at risk it is not something which would be activated prior to a bank failure the bailing of deposits could be used prior to a failure to stop a bank failing now having dealt with Australia let's just cover briefly in New Zealand and here the situation is rather different the Treasury recently published the questions and answers relating to phase 2 of the review of the Reserve Bank Act in June 2019 in fact and one of the topics that was covered was the proposed reintroduction of a Deposit Guarantee a process in New Zealand doesn't exist at the moment in fact they are still consulting on the shape and size of this Deposit Guarantee but they're saying that a range of thirty to fifty thousand dollars is what they're proposing and they're saying that that amount would protect around 90 percent of individual bank depositors in New Zealand but that would still leave the majority of bank deposit funding at risk and they think they say that would strike the right balance between protecting small depositors from loss and enhancing public confidence in the banking system on the one hand while maintaining private incentives to monitor bank risk-taking on the other now of course we went through this the other day when we went through the scorecards that are now published in New Zealand relating to the banks so that people can understand more about the risk in the system now they're also wrestling with the costs of funding the proposed depositor protection scheme and there will be some one-up costs and also some ongoing operational costs and they make the point that modern deposit insurance schemes are normally funded by levies on members bank supported where necessarily by temporary lending paid for by taxpayers if the insurance scheme is accomplished by deposited preference this might also increased banks non deposit funding costs as risks are transferred from depositors to institutional investors and they say that details of the scheme including costs have still to be worked out in the next phase of the program and it also be a full cost benefit to be done and the final point to say is that they are going through the process of thinking about mandates and powers governments and decision making accept cetera and they're suggesting that the scheme could well be a couple of years away from being implemented so at the moment depositors in New Zealand have no Deposit Insurance Scheme at all and therefore it's important for individual savers to understand the relative risks of the banks that they may be placing their deposits with hence those score cards that we were discussed previously so they're yeah that's the long and the short of the deposit schemes in Australia and New Zealand the scheme in Australia is perhaps more generous although needs to be activated and there are some limitations to the way it works in New Zealand there is no scheme at the moment I'm Martin North from digital finance analytics May thanks for watching and I'll see you again next time [Music] you
