As Australia faces its first recession in decades, you may be curious as to whether your money is safer in a bank or hiding under your mattress.
While there are laws in place designed to protect deposit-holders, murky legislation passed in 2018 may mean that your deposits are vulnerable. Let’s explore how the money you deposit into a bank is kept safe, and whether it is at risk of being compromised.
Firstly, your money is typically safer in a bank than in your own home. If your home were to be robbed, unless you had fantastic insurance, those funds are potentially lost forever. In the unlikely event your bank was robbed, there are insurances and protections in place to preserve your account balance.
Secondly, and most importantly, deposit taking institutions in Australia are covered by the Financial Claims Scheme (FCS). This is a government deposit guarantee, in which deposit-holders (those with savings accounts, term deposits etc.) with authorised deposit-taking institutions are protected in the event that institution were to go under. Deposits up to $250,000 are protected and will be paid per person or per institution.
However, there is a little-known scenario that may make this situation more precarious – the bank ‘bail-in’ – and this has amplified a lot of Australian’s fears around keeping money in banks.
The "bail-in" explained
As opposed to a bail out, in which a government provides financial instructions with funds to ‘bail them out’ from going under, such as what happened during the Global Financial Crisis (GFC) in America, a bail-in protects financial institutions in a different way.
- In a bail-in, a bank is able to essentially take money from your deposits to bolster its own finances in an emergency situation.
This action did occur in Cyprus during the 2012 – 2013 Cypriot financial crisis, through a one-time bank deposit levy to raise $7.5 billion in needed funds. Deposits with balances below €100,000 were to have 6.75 per cent withdrawn, and 9.9 per cent was to be withdrawn from uninsured amounts above €100,000. Depositors were to be compensated with the equivalent amount in shares with their banks.
But could this happen in Australia? A recent ABC article shows that there is legislation (passed in 2018) that allows Australian Prudential Regulation Authority (APRA) the power to “allow a bail-in financial instrument, known as ‘hybrid securities’”. This legislation is, understandably, causing some concern and being heavily scrutinised.
Two hundred submissions to remove any legislative “uncertainties” around whether APRA and banks can bail-in Aussie deposits have been submitted since 2018, and politicians are fighting to change this too. The main concern appears to be that the laws are vague in their description of what deposit-taking institutions may be able to do with deposit-holder funds.
However, the Treasury and the Australian Bankers Association have denied this argument, making reference to the FCS as part of the protections that are in place to prevent something like this from ever happening.
Thankfully, Australia is in a completely different financial position than Cyprus. A bail-in is such a controversial move that it is unlikely the APRA would allow it to occur.
APRA Chair, Wayne Byres, spoke on this issue to the House of Representatives Standing Committee on Economics in March 2018.
“Another critical component of a resilient financial system is ensuring we have a strong regulatory framework, particularly in times of crisis. This framework has been strengthened with the recent passage of the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017.
"The Bill provides a welcome and substantial improvement to APRA’s crisis management powers, better equipping us to deal with the actual or imminent failure of a financial institution. It is an underappreciated but essential piece of infrastructure that maximises the public sector’s ability to preserve an orderly financial system in times of stress," said Mr Byres.
Addressing fears around a 'bail-in' directly, Mr Byres said: "Concerns have been expressed in some quarters that the Bill might allow APRA to confiscate or otherwise use depositors’ money to save a failing bank.
"I would therefore like to use this opportunity to state clearly that that is most definitely not the case. There is no such power in the Bill. Indeed, APRA’s purpose under the Banking Act is to protect depositors, and the idea of ‘bailing in’ deposits would be anathema to that core purpose.”
In fact, another safety net also exists to protect Australian deposits – the Reserve Bank of Australia’s (RBA) Committed Liquidity Facility (CLF). This helps to ensure banks are in a solid financial position and can manage any liquidity risk. It was introduced to protect Australians from economic situations like in America or Cyprus following the GFC.
At this point, it still appears that keeping your money in a financial institution is still the safest place for it.
Benefits of keeping money in a bank
While there are obvious benefits of keeping your funds in a bank, such as safety and accessibility, it’s also generally much easier to reach your savings goals with a bank.
Keeping your money in a high interest savings account, and ensuring you meet any conditions, or are aware of a high introductory rate period, will always help you to reach your savings goals faster. This is because of compound interest.
Compound interest allows deposit-holders to earn interest on their interest. Meaning, if you deposit $1000 into a savings account and earn $15 in interest in one month, your balance will now be $1015. Next month you will earn interest on this full amount, not just your original deposit amount, so your savings will snowball over time.
Unless the RBA’s cash rate were to plummet below zero per cent, a savings account is crucial for helping millions of Aussies reach their savings goals.