Cashing In on Fear – Will the Government Honour its Deposit Guarantee?

Ed note: Bill Bonner will now be featuring regularly in The Rum Rebellion, you can find his article in today’s edition.

WARNING! Today’s edition of The Rum Rebellion is a little longer than usual.

There’s no shortage of topical issues to cover…our ‘better’-than-expected CPI…you must be happy/delighted/over the moon to know that paying more for fuel and travel is a ‘good’ thing? No, didn’t think so.

The Fed’s 0.25% rate cut…yawn.

Climate change. Thanks for all the emails. Fantastic responses…from both sides of the debate. More on this next week. Got some good stuff to share with fellow sceptics.

As interesting as these matters are, my overflowing inbox tells me you have more pressing matters on your mind.

Those of you who have taken or are considering taking a more defensive position — more cash and less shares — are expressing reservations/concerns/fears about the safety of the Australian banking system.

‘If ‘push comes to shove’ in a global financial crisis, will the government honour its deposit guarantee?’.

‘Look at what happened in Cyprus. The government can confiscate my money.’

‘Should I buy gold or stash my money under the bed?’.

Free Report: Greg Canavan’s Top Two ASX Gold Stocks for 2019

From the emails I’ve received, the seeds of doubt are primarily being sown by the Citizens Electoral Council (CEC) and bullion dealers.

Researching the safety of our banking system has been a high priority for me in recent years.


The majority of our family wealth is in term deposits…that’s what you call a ‘vested interest’ in this matter.

Over the years I’ve shared my findings and thoughts on this matter in The Gowdie Letter.

Today, I’ll share with you an some edited extracts from previous issues of The Gowdie Letter.

To do your concerns justice we have to dig a little deeper than normal…hence the longer than usual Rum Rebellion.

If you’re pressed for time, the short answer is, your money in the bank is safe up to the $250k deposit guarantee.

For those who want more detail, here we go…

In March 2018, in response to concerns about money in the bank being confiscated, I issued this challenge to readers of The Gowdie Letter

If anyone can provide me with the page number/s from the ‘Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017’ that support the assertions of ‘cash confiscation’ and ‘SMSF cash can be confiscated’, I would be extremely grateful.

Unless I receive information to disprove the Government’s public statements on how the FCS operates or the Government amends the sites to reflect what is being alleged, then my reasons for holding cash remain unchanged.

There were responses…but none included any facts, supporting evidence or references to any legislation.

What I did receive — in vast numbers — was a copy of the CEC latest newsletter titled ‘The great bail-in cover-up underway’.

If you want to read the entire newsletter I suggest you go to the CEC (a federally registered political party) website.

My summation of the CEC campaign is they’re trying to cash in on peoples fear.

Here’s why I draw that conclusion

Senates Estimates Hearing 1 March 2018

Here’s a few edited extracts and my running commentary

APRA chairman Wayne Byres continued the cover-up in testimony to a Senate estimates hearing on 1 March.

Byres’ testimony was full of half-truths and outright deceptions, as he sought to duck questions relating to how APRA’s lax regulation of the banks has led to their reckless lending practices and consumer abuses. He was especially misleading in his responses to Senator Pauline Hanson, who grilled him on the APRA bail-in law.

Vern: I have little quarrel with the accusation that banks have engaged in ‘reckless lending practices and consumer abuses’, but that is of no concern to me when assessing whether the $250K deposit guarantee is bogus or not.

When it comes to the APRA bail-in law we are told he was ‘especially misleading.

We’ll come back to that shortly.

Conflicted thinking

Another extract (emphasis is mine)…

Senator Hanson opened by asking Byres about the government’s guarantee of deposits up to $250,000, the Financial Claims Scheme (FCS), which the government cites to claim that the law won’t bail in deposits. She based her question on former APRA principal researcher Dr Wilson Sy’s submission to the Senate inquiry into the law, which revealed that deposits are not currently guaranteed under the FCS, because the FCS is not currently activated. Dr Sy noted that in deciding whether to activate the FCS, the government would have to weigh up the objective of depositor protection against the objective of financial stability, and if they are in conflict, APRA would prioritise financial stability.

Vern: The highlighted section is just plain irrational.

At present deposits are NOT guaranteed because the Financial Claims Scheme (FCS) has NOT been activated.

That makes about as much sense as protesting ‘that the life boats have NOT been inflated because the ship is NOT sinking’.

The life boats are there to be activated in the event the stability of the ship is threatened.

And this comment is just plain silly…‘the government would have to weigh up the objective of depositor protection against the objective of financial stability, and if they are in conflict, APRA would prioritise financial stability.

Depositor protection and financial stability are NOT in conflict; one provides the other.

Imagine the government declaring ‘in order to restore stability in the financial system we’ve instructed APRA to confiscate all deposits’?

Do you think people will breathe a collective sigh of relief at this announcement or do you think there will be anarchy?

In response to the difficulties faced by Portuguese and Italian banks in 2016, the Australian Financial Review (AFR)…‘European Court of Justice ruling in July [2016] that regulators need not bail-in bonds when injecting equity into failing banks if “implementing such measures would endanger financial stability or lead to disproportionate results”.

The Europeans recognised that calling on bank issued bonds (which rank much lower than deposits) to recapitalise banks would endanger financial stability. What do you think confiscating deposit would do?

Seriously, to imply there’s a conflict is patently ridiculous. The claim doesn’t stand up to the ‘pub test’.

Get real with your claims

Another extract…

Senator Hanson asked, “The question that many voters are very worried about, and I am anxious to have verified by APRA, is: are bank deposits currently protected by the FCS—that is, is the Financial Claims Scheme currently activated?” In response, Byres conceded, “Well, it’s not currently activated in the sense that it’s only activated when a bank fails.” He [Byers] then claimed that the FCS guarantee is real for deposits up to $250,000.

However, what Byers didn’t say is that the APRA law gives the regulator bail-in powers to intervene in banks before they fail, to be used well before the FCS can be activated.’

Vern: Yes, APRA can intervene prior to activating the FCS. And yes, the FCS is real for deposits up to $250k.

According to the Reserve Bank of Australia’s ‘Depositor Protection in Australia’…

APRA also has a wide range of legislated powers that enable it to take direct action if it identifies behaviour or financial distress that may threaten an ADI’s ability to meet its financial obligations to depositors, or otherwise threaten financial system stability. These include powers to: obtain information from an ADI; investigate an ADI; give binding directions to an ADI (such as to recapitalise); and, in more extreme circumstances, appoint a statutory manager to assume control of a distressed ADI. It also has the power to prevent an Australian branch of a distressed foreign-owned ADI from moving assets out of, or liabilities into, Australia.

In the event that APRA identifies financial distress in an ADI (Authorised Deposit-taking Institution) it has the power to take direct action. That action could be as far reaching as recapitalising the banks by confiscating share holder capital and writing-off the value of hybrid securities. If those measures are not sufficient to protect deposit holders, then, as a line of last defence the FCS is activated to safeguard depositors holding ‘protected accounts’.

Pauline never lets the facts get in the way of a good headline

Another extract…

Senator Hanson pressed him [Byers] repeatedly for a direct answer, finally insisting, “My question was: in a crisis in this country can you enact to actually take the money out of depositors’ accounts, as happened in Crete [she meant Cyprus] and Greece?”

Byres finally spat out: “No. We do not have the power to bail in—as is the sort of the common-language term—depositors’ money.” This is untrue, because the law explicitly empowers APRA to “convert” into worthless shares, or “write off”, a bank’s so-called hybrid securities if it gets in trouble it adds “or any other instrument”, which is language so broad that it doesn’t exclude deposits, creating the danger that APRA could find a way to grab them in a future crisis.

An emphatic ‘no’ is interpreted as an ‘untruth’ and ‘misleading’.

Let’s look at what happened in Cyprus. This is an extract from the official Eurogroup announcement as reported in Macro Business on 25 March 2013 (emphasis is mine).

The Eurogroup has reached an agreement with the Cypriot authorities on the key elements necessary for a future macroeconomic adjustment programme. This agreement is supported by all euro area Member States as well as the three institutions. The Eurogroup fully supports the Cypriot people in these difficult circumstances.

The programme will address the exceptional challenges that Cyprus is facing and restore the viability of the financial sector, with the view of restoring sustainable growth and sound public finances over the coming years.

The Eurogroup welcomes the plans for restructuring the financial sector as specified in the annex.

These measures will form the basis for restoring the viability of the financial sector. In particular, they safeguard all deposits below EUR 100.000 in accordance with EU principles.

Are we clear on that point?

Deposits below the deposit guarantee level of EUR 100,000 were safeguarded.

What about amounts above that level — the ones that fall into the any other instrument category?

On 28 April 2013, the UK Telegraph published an article titled ‘Bank of Cyprus executes depositor bail-in’.

Here’s an extract (emphasis is mine):

The so-called ‘bail-in’ forces savers to foot the bill for the recapitalisation of Cyprus’ biggest bank, after it was hit by massive losses from its exposure to debt-crippled Greece.

Bank of Cyprus said it had converted 37.5pc of deposits exceeding €100,000 into “class A” shares, with an additional 22.5pc held as a buffer for possible conversion in the future.

Another 30pc would be temporarily frozen and held as deposits, the bank said.

This is not new news. I have repeatedly stated that anything over (exceeding) $250k per deposit holder per ADI is potentially fair game for the regulators.

A fine line between stability and instability

Whether the confiscation of deposits over $250k happens or not is an unknown.


Because of what the European Court of Justice recognised…there’s only so much you can confiscate before the public panics.

It’s a fine line to tread between stability and instability. Confidence is a very fickle commodity.

A rumour can start a bank run and a possibly unfounded prophecy becomes a self-fulfilling reality.

Which is why I think the authorities will step in well before wholesale public panic takes hold.

The RBA to the rescue

The original deposit guarantee was invoked during the midst of the GFC to restore calm.

What’s to stop the same type of ‘policy on the run’ type approach in the next crisis?

This is from the RBA’s Depositor Protection in Australia’ (emphasis is mine):

The Reserve Bank of Australia (RBA) has an overarching mandate to promote financial stability, including through its role in providing liquidity support to ADIs as part of its market operations, and as regulator of the payments system. More generally, the Council of Financial Regulators (the Council) — a non-statutory body comprising APRA, ASIC, the RBA and the Australian Treasury — is a forum for these agencies to share views and coordinate policy actions aimed at ensuring the safety and efficiency of the financial system.

Unlike their central bank counterparts, the RBA has not yet resorted to QE and asset buying programmes.

But who’s to say they won’t go down this well-trodden track next time to provide liquidity support to ADIs?

Central banks buying government issued debt is an everyday occurrence nowadays.

My guess — and let’s face, if that’s all CEC and others are doing as well — without China coming to the rescue next time, the RBA is going to crank up the printing presses to enable the government to issue debt financed emergency funding.

We’ll see who’s the better guesser.

Prepare for the worst and hope for the best

My worst case scenario — which I’m not entirely convinced is going to happen — is for:

  1. Confiscation of some or all of amounts above $250k
  1. Banks accounts with $250k or less to be frozen
  1. Capital controls — limited daily or weekly access to cash — to be introduced

With the ability to transact electronically, none of these measures overly concern me.

Sure, it’ll be painful to have restricted access to cash. But you can have a ‘cash stash’ put away in advance to circumvent this inconvenience.

Other than that, I don’t see that it’s that much different to the way most people conduct their lives today.

I look at our bank balances from time to time but never want to hold the physical cash.

We mostly transact electronically — using online banking, debit or credit cards.

To me, if the worst case does happen, it won’t change how we conduct our lives all that much. Perhaps that’s naive. But from what I observed in Athens in 2016, life and commerce goes on.

Successful investing requires decisions made calmly, rationally and based on facts, not kneejerk reactions to fearmongering.

There’s absolutely no way the Australian Government will not backstop the banks in some way, shape or form. Restoring and maintaining confidence in the system is paramount. Unlike Cyprus, our government owns the printing press to ‘do whatever it takes’.


Vern Gowdie,
Editor, The Rum Rebellion

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Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

The Rum Rebellion