Monday, August 5, 2013

$250k+ in an Australian bank? Beware the bail-in.

Last week the AFR reported the Rudd government was looking to introduce a deposit levy (tax):
The Rudd government plans to impose an insurance levy on all bank deposits, risking a major fight with one of the best-resourced industries on the eve of the election campaign. 
Senior banking figures indicated on Thursday night they would oppose the move and depict it as a tax on bank depositors. 
The government plans to impose a 0.05 per cent insurance levy on every deposit of up to $250,000 to protect depositors against collapses. 
The banks said they will pass on the impost, which equates to 5¢ for each $100, to customers through reduced interest payments on deposits.
The banks are up in arms over who will foot the bill and there has been a media storm over the tiny fraction of a % that this insurance will cost (for example a bank would need only lower the interest rate paid on a deposit from 3.50% to 3.45% in order to recoup the cost). While the media, banks and politicians get into a scuffle over who will fund the minuscule cost of insuring funds under $250k, there seems to be no investigation or reporting by the media on what might happen to funds over the 'guarantee' limit in the case of a bank failure...

Eric Sprott said the following in a recently released interview:
“The one event in my mind would be when it becomes apparent to everyone that having a deposit in a bank is a very risky situation. We saw that in Cyprus where the depositors got nailed on the bail-in. We’ve seen all these proposals to have bail-ins as the solution to the problem in the US, in Canada, in Britain, in New Zealand and in Europe. All the paperwork has been laid out.”
While Sprott doesn't explicitly list Australia, keen eyed blogger 'Barnaby Is Right' captured these interesting snippets from papers that are flying about between our banks, regulators and the treasury, suggesting not only are Australian banks prepared to bail-in customer funds to get out of trouble, but will do so without any warning or disclosure to the market before such an event:
In a November 2012 Technical Note on the Financial Sector Program Update for Australia, as part of their Financial Safety Net and Crisis Management Framework, the IMF has advised that there is a problem:
[Past simulation exercises revealed the need for legislative changes to prevent premature disclosure of sensitive information. Australia’s securities disclosure regime requires, for the protection of investors, immediate and continuous disclosure of information that could reasonably be expected to have a material effect on the price or value of an ADI’s securities. There is a high probability that any resolution or crisis response measures will impact the price or value of an authorized deposit-taking institution’s (ADI’s) securities.
Poor coordination of compliance with the disclosure requirements, timing of resolution or crisis response actions, and the overall public communication strategy regarding these actions could pose risks to financial stability (e.g., through depositor runs) or thwart resolution actions (e.g., through the stripping of the ADI’s assets by insiders) or cause market disruptions. Legislative changes that reduce tension between investor protection and financial stability should be pursued.]
“Reduce tension” between investor protection and financial stability?!
By making laws to “prevent premature disclosure of sensitive information”?!?!
In order to prevent bank runs, which would happen if investors were to find out that a Cyprus-style “resolution or crisis response measure” is in the offing for the bank that they have their money in?!?!!!!
It's unlikely that an event requiring a bail-in would take effect in the near future without further warning signs, but the high level of exposure that Australian banks have to residential mortgages (as recently reported by Moody's) should be sounding alarm bells for those who have deposits at risk...

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  1. Would this affect offset or redraw loan account, you think?

  2. Offset accounts are covered by the deposit guarantee (up to $250k), so likely funds above $250k would be at risk of bail-in:

    Redraw funds are not a deposit, it's only money you have access to draw down/borrow so is not relevant.

  3. So where do we put our savings BB? My wife and I have ~$300k saved. One day we want to buy a home, we just don't know where yet. I understand the idea of putting it into PMs, but if we would have done that a year ago we'd be pretty pissed right about now.

  4. BT, I don't advocate putting 'life savings' destined for purchasing a house into PMs, but do think holding some is a good idea (as an insurance asset).

    The government guarantee is per customer, per institution, so a way to mitigate risks for funds over $250k may simply be to split your deposit across two different banks. More information here:

    I think it's also worth keeping some physical cash outside of the banking system (even if just a months living expenses worth), even if funds are guaranteed there is no telling what sort of freeze or withdrawal limits they might put in place short term if one of our banks was to get into trouble and require government assistance.

  5. So you don't expect an all out Cyprus style bail-in? If a bank did fold, do you expect the RBA would just "print" enough money to give to depositors and bail them out?

  6. To the best of my knowledge the Cyprus bail-in is still respecting the insured amounts of 100,000 Euro or less, hence why it would be safest to structure any accounts so your funds are protected under the government guarantee.

    The RBA may intervene like they did during the GFC by buying mortgage backed securities and providing other liquidity, certainly would not surprise me.

  7. Put some 100K in two more different banks. The banks will confiscate a percentage of everything over $250,000. Also keep enough cash at home for a "bank holiday" so you can pay bills, eat & put gas in your car.

  8. Potential account holders should also review the assessments of the
    International Monetary Fund on the various offshore banking institutions
    and narrow down on the possible countries they would want to set
    accounts in.

    how to open australian bank account

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