The Global Financial Crisis seems ‘just the other day’ but not for those in their twenties and early thirties, they were children or young teenagers at the time. The Australian government, like others around the world, were concerned about the prospect of bank runs – depositors on mass demanding their money be repaid to them. This could have caused many bank insolvencies. So, to protect the banking sector, our government launched the ‘Financial Claims Scheme’ in November 2008. Through that scheme government guaranteed up to $1 million per depositor. Then in February 2012 it changed the arrangement to $250,000 per account-holder, per institution. Since Australia has about 70 banks, the government could guarantee up to about $17,500,000 per depositor. That depositor just spreading the money across all 70 banks. Most depositors would have invested considerably less.
Since large numbers of people have money in cheque and savings accounts and on term deposit, and since we are guaranteeing that money, we should know what aggregate amount we are exposed to, but we don’t. The Financial Claims Scheme’s does not have a maximum liability, its exposure at any point in time is the aggregate amount of all eligible funds (up to $250,000 per depositor) at the time the bank fails. The current aggregate is not disclosed. It appears government doesn’t even know.
We should know what this exposure is – because we are the one’s guaranteeing it. If any bank fails, we the people will be liable for paying the depositors. The reality is that it is not the government that guarantees the deposits, it’s the Australian people. Whether it collects money from us through taxes or borrows or otherwise prints money, we (the Australian people) pay government, we repay the loans, pay interest on the loans and inflation arising from the additional money supply erodes the buying power of our money, the AUD.
So, since we are in effect guaranteeing the banks and have government representing us in the negotiations, what are we getting in return for providing that guarantee? If you were asked to guarantee another person’s debt, wouldn’t you want some money to come your way for taking that risk? Of course you would?
How much do think our government officials negotiated we get in return for guaranteeing the bank deposits? Nothing, zero, not a cent. So, we are exposed to hundreds of billions of dollars, perhaps even trillions of dollars, of risk while we get no compensation for taking that risk. It is bewildering that our government considered that to be a good deal for us, the people it is supposedly representing.
What do the banks get out of it? Most of our 70 odd banks lend most of their money on mortgages – property loans. These are typically medium to long-term, often 20 years. Deposits on the other hand are typically short-term – at call or in the case of fixed deposits are generally up to 12 months. That exposes banks to a liquidity risk – if depositors get nervous, they can request repayment of their money, and that can cause a run on the banks – leaving them unable to repay the deposits when due for payment. Those unable to meet those withdrawal requests would be insolvent. Because of this risk banks have traditionally needed to be very cautious in their lending activities. If depositors get concerned that doubtful debts are building, they may want to get their money back asap. Once government (the people) guarantees the deposits, the depositors will be far less concerned about bank risk, and because they are unlikely to stage a ‘bank run’, banks can make more risky loans.
So, the banks can make more risky loans, we all guarantee the banks, and we get no benefit from doing so. That shows reckless management of our money by government.
Classic Liberals’ view is that either the banks pay government (us) an appropriate return for the guarantee or lose the guarantee.