Australian Government Savings Guarantee Guide

Silent Run On Financial Institutions In 2008

Back in October of 2008, when the global financial crisis (GFC) was causing all sorts of strange financial phenomena to take on life, the Australian government activated a scheme to secure all savings deposits up to $1M per individual per authorised deposit-taking institution (A.D.I.). A silent run on the banks was taking place due to the GFC and if left unchecked it would have been a very dark occurrence during a time that was already very bleak.

News Media Didn’t Notice

Among the tales was one reported in “The Australian” in June of 2010, some two years later. (The time lapse gives recognition to how well the government kept a lid on the run with fast action.) An elderly woman in Queensland withdrew all of her deposits to the tune of $100,000 plus. She plopped it in a suitcase and then returned to the bank officer and asked to rent a safe-deposit space. She threw the suitcase in the vault and went home happy. She wouldn’t be standing in any bank-run line.

Other folks started runs on ATMs around the nation. If the nascent, silent run on the banks had been noticed by the media, it would have taken on a life of its own, wreaking havoc as policeman would have had to patrol customers lined up to make withdrawals. And ultimately some depositors would have had to be turned away, which could have led to riots.

Even Rumours Could Have Wreaked Havoc

To ensure confidence in the banking system, the federal government quickly moved to back up all deposits to $1M per individual per financial institution – banks, building societies and credit unions among them. Hefty fees were charged to the A.D.I.s, but they could haven chosen to opt out of the coverage. Very few did. Then Treasury Secretary Ken Henry said. “With a bank run, or any rumour of a bank run, you can’t play games with that.” The run never materialised into a full-blown financial disaster thanks to the government’s quick action to guarantee deposits.

Government Extends $1M Guarantees Through February 2012

As things have settled considerably since those bleak days, the government has had the deposit guarantee scheme under review since May of this year. Now that savers and investors have had their confidence in the various financial institutions bolstered, the government has decided to keep the guarantee in place into the foreseeable future, but after February, 2012, the amount guaranteed will be lowered to $250,000 per individual, per A.D.I.

Generous Guarantee

The four-month lapse from October to February will allow financial institutions the time needed to update paperwork and administrative procedures. The current guarantee was to expire this October, 2011. All accounts established before February, 2012 will be grandfathered under the current $1M guarantee through December, 2012. Those accounts will then revert to a lower guarantee of $250,000 come January, 2013.

Despite the reduction, Australia will still be among the most generous nations in its deposit guarantees. For instance, the U.S. insures its accounts to $288,000, and the Australian guarantee of $250,000 is about twice as high as those offered by Japan or Canada.

Financial Institutions Among The Best In 2008 And Strong Today

Ironically, despite the so-called silent run and the deposit guarantees it fomented, the Australian banks were among the best performing in the world during the 2008 GFC. This was attributed to the nation’s strong prudential regulatory system that governs the financial institutions. The guarantee of deposits was a contributing factor as well.

A sharp rise in savings has reached a two-decade high this year, according to the “Courier-Mail.” In a recent financial stability overview, the Reserve Bank of Australia (R.B.A.) says the major financial institutions are well-placed to overcome any new financial crisis. This could be seen as a nod of reassurance regarding the financial shenanigans still bugging the European Economic Community today.

Financial Institutions And Depositors Should Downsize Dreams

Financial institutions and their clients have gotten a pretty good idea of the monetary monster they are facing around the globe today. Growth will be slower than before the GFC, but this will be due to the more cautious approach being taken by households and businesses in their savings and investments.

Some would argue that the guarantees could be seen as a signal encouraging risky financial behaviour, but so far no evidence exists to uphold such an argument. But, financial institutions and their clients should downsize their expectations, regarding returns on investments, to be consistent with an environment of slower credit growth.

Australian Financial Institutions Most Stable

According to the R.B.A., the nation’s financial institutions are some of the most stable in the world right now. With the $250,000 guarantees in place, investors and depositors don’t need to be unsure about the safety of their deposits in the covered A.D.I.s. If money is to be deposited or invested for sums larger than $250,000, additional accounts could be opened with different institutions.

More Valuable Than Gold

Should any Australian financial institution be unable to handle a new banking crisis, the government will step in and rescue any depositors or investors. But now most institutions have enough leverage and liquidity that they probably wouldn’t fall into a crisis situation in the first place. Just the knowledge of the guarantees should be enough to forestall any feelings of instability consumers or clients might have regarding the institutions where they do business. Strong confidence in a nation’s banking system could be a currency as valuable as gold.

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