On May 20, 10:31 pm, ppnerkDELETET...@[EMAIL PROTECTED]
(Phred) wrote:
> Thanks for your reply Phil. Unfortunately that link seems to have
> died: "Sorry your page was not found ..." So in the absence of
> contrary opinion I'll happily accept what you said above. :-)
The link still works for me. Well, here's the full text, regardless...
-- Phil
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Guarantee no savings grace
By Barbara Drury | October 3, 2007
Last month Australians switched on the evening news to see people
lining up outside a British bank called Northern Rock to withdraw
their savings, some swearing they would never trust a bank with their
money again. Many Australians would have been left wondering what
guarantee they have that their savings are protected from a bank
collapse.
In short, there are no iron-clad guarantees that you will receive your
savings in full in the unlikely event that your bank goes belly-up.
Deposits in Australian institutions such as banks, credit unions and
permanent building societies are not guaranteed by their regulator,
the Australian Prudential Regulation Authority, the Government or the
Reserve Bank.
Unlike the US and Europe, Australia does not have deposit insurance
whereby banks pay insurance premiums to a designated government-backed
institution to guarantee all or part of their savings.
In the US, for example, banks pay insurance premiums to the Federal
Deposit Insurance Cor****ation, a body similar to APRA.
Australian depositors do, however, have first claim over a failed
bank's assets.
Professor Fariborz Mo****rian, of the University of NSW's Australian
School of Business, says this acts as an implicit guarantee in the
Australian banking system but falls short of full protection because
the amount depositors receive is limited to the assets available to be
distributed.
No less a body than the International Monetary Fund believes something
needs to be done about Australia's arrangements for dealing with
failed banks. The IMF said in a study last year that Australia's
financial system was sound but recommended some form of depositor
protection scheme. 1
Banking regulators also acknowledge there's room for improvement.
However, they believe the main issue is speed. Depositors may need
cash for day-to-day living but end up waiting months to get their
money from a bank wind-up, or longer if it ends up in the courts.
The Council of Financial Regulators - representing APRA, the
Australian Securities and Investments Commission, the Australian
Treasury and the Reserve Bank - has recommended the Government
consider a funding scheme to give depositors timely access to their
money in the event of a bank failure.
Under the proposal, APRA would administer a facility using Government
funds to make an immediate payment of up to $20,000 to depositors.
Depositors could claim additional funds once the bank's assets were
sold. The money would be reimbursed from the proceeds of any asset
sale.
Because about 50 per cent of Australian bank assets are in the form of
retail deposits, the failed bank would have to lose more than 50 per
cent of its assets before depositors suffered a loss and the
Government was forced to levy the rest of the banking industry to
cover the shortfall. This is one reason the banks are opposed to any
form of depositor guarantee or insurance.
Nicholas Hossack, a director of the Australian Bankers' Association,
believes the present system of depositor priority is adequate and
argues that the costs of deposit insurance outweigh the benefits.
The banks argue that the cost of deposit insurance would inevitably be
passed on to bank customers but also point to the "moral hazard"
argument.
Hossack says deposit insurance has the potential to encourage people
to bank with less financially sound institutions on the understanding
that they will get their money back if the institution goes under,
which undermines the need for fringe institutions to follow sound
lending practices.
"Deposit insurance lifts the whole risk profile of lending at the
margins," he says.
Deposit insurance is widely held to be at least partly responsible for
the 1980s Savings and Loan crisis in the US, where taxpayers' money
was used to bail out a number of failed Savings and Loans outfits,
similar to our credit unions.
In comparison, Hossack says, there has only been one small bank
collapse in Australia since 1890 and even then depositors lost only $1
in every $100. More recently depositors lost nothing in the collapse
of Victoria's Pyramid Building Society in 1990 but only because the
Victorian Government stepped in to cover all deposits.
Even with deposit insurance, bank customers could forfeit some of
their savings in the event of a bank collapse. In the US deposit
insurance covers deposits up to $US100,000 and there is talk of
increasing the cap to $US200,000.
What's more, if you have a US account in your own name and another in
joint names, each account is insured up to the limit.
Mo****rian says it is common for Americans to operate multiple accounts
with deposit insurance cover in mind because, unlike Australia, bank
collapses are a regular occurrence in the US.
In Europe deposits are insured up to EUR20,000, while in Britain 90
per cent of each deposit is insured up to a maximum of ?35,000. For
example, someone with a $10,000 deposit would receive $9000 while
someone with $100,000 would receive only the maximum $81,000.
"One of the arguments for deposit insurance is that it prevents bank
runs and helps governments avoid issuing blanket [depositor]
guarantees. Both arguments were undermined at Northern Rock," Hossack
says.
One of the problems in the British and Australian systems is the
understanding that governments will bail out customers of failed
banks.
Indeed, the British Government was forced to guarantee all deposits at
Northern Rock to prevent a stampede of customers clamouring to
withdraw their savings. Even with deposit protection, there is a wait
of some months before depositors get their money and then there is a
cap on the amount they receive. Customers were doing the rational
thing and getting their money out while they could.
The Council of Financial Regulators argues that the best way to
cir***vent the need for government bailouts is our present system of
depositor preference, backed up with a facility to pay depositors up
to $20,000 quickly and the rest once the asset sale is complete.
"With the current climate [of concern about a lending squeeze brought
about the sub-prime loan crisis], it sounds rational to have deposit
insurance but it could be an additional cost to taxpayers," Mo****rian
says.
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