Little Known Budget Detail You Can Bank On — Banking System Stronger

Budget Eve just doesn’t have the same ring to it as Christmas Eve and New Year’s Eve.

Budgets are boring…but necessary.

We get to find out how deep the government will put its hand into our pockets and where our taxes (and not insignificant borrowings) are being spent and wasted. What special interest groups are in and out of favour.

Tomorrow there will be the usual ‘winners and losers’ headline.

Budget’s Statement of Risks

One of the areas of interest for me over the years has been in the fine print of the Budget’s Statement of Risks.

This rather peculiar bit of curiousity stemmed from the sheer volume of emails I received on the topic of ‘how safe are our banks?’.

Up until recently, the solvency of our banking sector was a real issue for lots of readers.

Of late, not a word. Absolute radio silence on the topic.

Has the central banker-led post-pandemic recovery calmed all fears? Our banking system appears to be stronger than ever. The prospect of collapse is on par with Malcolm Turnbull’s conversion to a climate change denier.

Despite appearance, the global financial system is less safe than it was a few years ago. More debt is being pumped into highly-inflated assets and risk taking is scaling new heights.

As Minsky famously said, ‘stability leads to stability’.

So for now things are stable. But we are only one (unpleasant and unexpected) surprise away from instability. Sending tremors from Wall Street to your local bank branch.

That’s why, for me, the Budget’s Statement of Risks makes for interesting reading…I know, I really must get a life.

The fine print of the Financial Claims Scheme (and as we know the devil in the detail is always in the fine print) can be found on page 20.

The 2020/21 Statement of Risk states (emphasis added):

The Australian Prudential Regulation Authority (APRA) is responsible for the Financial Claims Scheme. Under the Financial Claims Scheme, any payments to account-holders with eligible protected accounts or eligible claimants would be made from APRA’s Financial Claims Scheme Special Account. Under the legislation, upon activation, up to $20 billion per institution would be available to meet Financial Claims Scheme payments and up to $100 million for administration costs per institution.

This statement is consistent with every other year.

Under current legislation, the MAXIMUM government rescue package for a failed institution is $20 billion.

A quick check of APRA’s latest Monthly Banking Statistics (released on 30 April 2021) reveals total deposits held by the 125 Approved Deposit-taking Institutions (ADIs) is approximately $2.4 trillion.

The top 10 ADIs — by deposits held — are:

Total Deposit Rounded to The Nearest Billion

[Click to open in a new window]

Even the not-too-keen observer will see these brand-name institutions all exceed the MAXIMUM rescue package of $20 billion.

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But all is not what it seems.

Let’s do some maths.

We know total deposits are $2,400 billion ($2.4 trillion). Of that total, $2,081 billion is deposited with just 10 ADIs.

Which means the balance — $319 billion — is scattered amongst the remaining 115 ADIs.

Based on these numbers, the MAXIMUM amount the government would be liable for under the Financial Claims Scheme would be…

115 ADIs with $319 billion in deposits and 10 ADIs (maxed at $20 billion each) $200 billion. The total amount the taxpayer would be on the hook for is $519 billion.

Simple maths.

But if the 2020/21 Statement of Risks states:

The Financial Claims Scheme provides depositors of authorised deposit-taking institutions (ADIs) and claimants of general insurers with timely access to their funds in the event of a financial institution failure. Under the Banking Act 1959, the scheme provides a mechanism for making payments to depositors under the Australian Government’s guarantee of deposits in ADIs.

Payments are capped at $250,000 per account holder per ADI. It is estimated that deposits eligible for coverage under the Financial Claims Scheme were $1.0 trillion at 30 June 2020, compared to an estimated $930 billion at 30 June 2019. This reflects overall deposit growth in the financial system due to fiscal policies that were implemented to support the economy during COVID-19 and consumer caution resulting in an increase in the savings rate.

Deposits eligible for coverage is $1 trillion.

That’s almost double our simple maths number.

Is this a bureaucratic error OR is the government signalling that, if required, it’s prepared to legislate an increase to the $20 billion cap?

My guess is it’s the latter.


Society functions on public confidence.

The 10/90 rule

We’ve all heard of the 80/20 rule, but in the case of the Australian financial system, it’s the 90/10 rule.

90% of the deposits are held by 10 ADIs.

The concentration of deposits in so few institutions means the government would face political pressure on an unprecedented scale if it failed to backstop the 10 largest banks.

Of course, as part of the rescue attempt, shareholders and investors in hybrids might take a haircut but I’m not so sure about deposit holders.

Allowing one or more of these banks to fail would be political suicide.

Public confidence would be shattered. Can you imagine the second-guessing going on? Which major bank is next to fall? Bank runs would become the lead news story every single night.

But, I hear you say, the government does not have $1 trillion. True.

However, as the COVID-19 stimulus efforts have shown, government bonds (issued to fund deficit spending) can be bought by the RBA with newly minted dollars.

Also, the government could ‘lockdown’ your capital within the bank. In technical speak, this is called capital controls. Greece did it. Cyprus did it. So we have precedent on this one.

With 90% of deposits held in just 10 banks, the government, realistically, cannot allow any of them to fail. The contagion risk is far too great.

What about the other 115 banks?

APRA could trigger the Financial Claim Scheme (FCS) for any one of the smaller institutions.

These would be covered by the legislated $20 billion rescue package.

The good news is that if you’ve kept your deposits under $250k per tax-paying entity per ADI, your money is government guaranteed.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.

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.

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