A short statement on deposit guarantees

The Australian Banking Association decided to attack or I guess counter-attack the Opposition (specifically, Joe Hockey today). Here is their statement. The bit that caught my attention was this:

Mr Münchenberg said: “Many of Mr Hockey’s claims are based on an assertion that taxpayers’ money is at risk, therefore Governments should have greater control over banks.  But taxpayers’ money is not at risk.”

“Under the deposit guarantee, in the unlikely event that one of Australia’s heavily regulated, closely supervised banks, credit unions or building societies collapses, no depositor or taxpayer will be left out of pocket, because the rest of the industry will be levied to cover any shortfall.

“Far from being underwritten by taxpayers, it is the industry itself that underwrites the deposit guarantee.  A Shadow Treasurer should be aware of that simple fact.

Except it isn’t a simple fact. If you look at the current government policy, it is true that we have a limited deposit guarantee for accounts under $1 million. But anyone with a sense of economics and government commitment knows that we have a much broader guarantee — like 2008, if another crisis occurred, we know that the government will guarantee all deposits in a widespread manner. That is the real guarantee as opposed to the formal one on the books. That is what Hockey and a host of economists are worried about.

The point is that we need to recognise that fact of life and, like everywhere else in the world, get the protected institutions to pay premiums on that and also to ensure that risk is managed so that there won’t be taxpayer claims.

Now if Mr Münchenberg would like to get his members to sign a pledge stating they will never accept government money and will fail if they get in trouble, I’d be interested to see it. But I think when push comes to shove it will be meaningless. Nonetheless, I am happy to be humoured.

Also, if the banks have agreed amongst themselves to bail each other out for losses that are not covered by the formal guarantee, I would love to hear about that too.

4 thoughts on “A short statement on deposit guarantees”

  1. Amen.
    And that other codswallop that Munchenberg’s predecessor used to go on with used to really get my goat… namely that because there had been no claims on the government against any of the wholesale funding guarantees written on the banks, it was money for jam for the government!
    Well by the same logic, any of the ABA’s constituents who are also in the insurance game should be prepared to refund all the premiums paid by their customers who didn’t make a claim in a given year!
    The wholesale guarantee was heavily subsidised by the taxpayer when compared with the banks’ credit default swap spreads at the time. They should be saying thank-you and going about their business, not paying the ABA to make spurious arguments on their behalf!


  2. Are you and Stephen not getting a bit confused here?  The guarantee you are talking about is on deposits.  That is insurance for depositors (taxpayers), so banks should not pay that premium, if anyone, taxpayers should.

    The insurance I think you are trying to talk about is for shareholders.  While the Government did guarantee debt during the GFC, that was mostly because Ireland did it and in the investment climate of the time, it was an arms race.  Australia had no choice.

    If I were a bank shareholder or debt holder, I wouldn’t assume the government will protect me from having to take a BIG haircut if things go wrong in the future.  Measuring the extent of that risk, and that protection, and then charging for it will be a lot more complicated to do efficiently than you may think, but its an interesting debate.


  3. The issue is one of liquidity.  The insurance of deposits benefits banks by underpinning depositor confidence in getting their money back, hence preventing runs on banks.

    I am sure banks would not like the alternative of matching borrowing and lending durations, hence giving up the premium they currently collect on the mismatch.


  4. With all due respect, Mr Münchenberg’s comments are total bollocks, completely ignoring the question of Moral Hazard.
    For the Banks to get into deep trouble, they would have to have been taking excessive risks.  Risk is what they are supposed to manage, that’s their business, that’s what they get to earn a profit for doing.
    Bank shareholders (owners!!!) have a responsibility to ensure that the Banks do their job properly, so lets not have any whingeing about shareholder or Bondholder haircuts.
    As far as Taxpayers backstopping the Banks is concerned, first, it isn’t the taxpayers’ responsibility, so forget that.  Further, if the Banks get into deep poo, you can bet that the rest of the economy, i.e., lots of us “Joe Average”‘s, are also in trouble, so why should Joe Average take a double hit?
    In all the countries in difficulties due to the GFC, the taxpayers have been hooked into Bank bailouts of one sort or another.  That’s not only dubious ethics, since it was the Banks that helped create the mess, it also further depresses their already depressed economies.


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