I’m taking requests. Lately, people have been asking me if bank deposits are safe. This is my response.
Are your bank deposits safe?
You might be wondering why I’m even asking the question. Of course our bank deposits are safe. There’s a government guarantee…
… isn’t there?
Well, there is. But what governments promise and what they deliver aren’t always one and the same.
And I’ve been getting a few questions about this. Is it possible that the government might ‘bail in’ depositors of a failing bank – that is, seize their deposits, and let depositors go down in a sinking ship?
Because there are some people – some very smart people – who think this could be a real possibility.
There’s less heat around this issue now, but back when the government updated the legislation around APRA the banking regulator, back in 2018, this was a real flash point.
At the time, the Citizens Electoral Council (The CEC has since rebranded as The Citizens Party) – a sort of American-style libertarian party – ran a strong campaign arguing that the legislation gave APRA the power to bail-in depositors.
The centre-piece to this campaign was work by Dr Wilson Sy – who had 6 years at APRA, and was chief researcher for a while.
The were two issues:
The first was around APRA’s mission: APRA is normally responsible for “protecting depositors AND ensuring the stability of the financial system.”
However, in the new bill states that APRA is allowed to make its decisions in secret, if it is in “the interest of protecting depositors OR ensuring the stability of the financial system.”
The ‘or’ is central. So the bill allows room for the stability of the financial system and the protection of depositors to be conflicting objectives. APRA then seems to have discretion as to which objective it targets as a priority.
The second issue was around section 11CAA of the bill, which says conversion relates to “Additional Tier 1” and “Tier 2” capital, “or any other instrument”. The CEC argued this reference to “any other instrument” could be read to include deposits.
The legislation also seemed to be rushed through parliament, with only 7 senators of 76 present in the Senate when it passed, and before One Nation had a chance to add an amendment explicitly excluding deposits.
However, while the government did seem to rush the legislation through, the Economics Committee did ask Treasury, APRA and the RBA to all provide written responses to the CEC’s claims. So it wasn’t totally buried.
These responses (unsurprisingly) rejected the CEC interpretation of the legislation.
Treasury said “The use of the word ‘instrument’ in paragraph (b) is intended to be wide enough to capture any type of security or debt instrument that could be included within the capital framework in the future. It is not the intention that a bank deposit would be an ‘instrument’ for these purposes.”
APRA told the committee “the reforms do not constitute a statutory power for APRA to write down or convert the interest of any other creditors in resolution, including depositors of a failing ADI”.
CEC wasn’t satisfied with the government’s response. But the campaign seems to have petered out and doesn’t feature on the Citizen Party website any more.
So, what do we make of it all?
It’s hard to know exactly how courts would interpret the legislation if it were challenged. It doesn’t explicitly allow for bail-in, but the ambiguity it leaves room for isn’t comforting.
However, I’m personally not sure how much it matters.
Since it’s only guided by legislation, if a government wanted to bail-in depositors, there’s every chance they could do so in the confusion of a crisis. Renegging on the Financial Claims Scheme (FCS) – the guarantee on deposits under $250K – would also be such a huge political play, that I don’t know if the legislative side really matters. The public expects that their deposits are protected. Any government that betrayed that trust would cop a lot of anger, regardless of whether they were acting ‘legally’ or not.
Also, unless you bailed-in all banks at the same time, you would create panic by bailing in any one bank. So say BOQ became insolvent, but the other banks were fine (for the moment). APRA doesn’t activate the FCS and bails in BOQ’s depositors. This sends a very clear signal that all deposits aren’t safe, which would cause a rush for the exits.
That is, you’d create a bank run.
So I kind of imagine that you’d need to bail in all depositors in the nation at the same time, or you create a bank-run. But that presumes all banks become insolvent at the same time. That level of synchronisation seems a like pretty low-probability outcome to me.
I also personally think it’s unlikely to be the most politically preferred option right now. The rise of Modern Monetary Theory (MMT) in the wake of GFC-era QE has opened the way to fiscal money-printing. (We’re seeing the first moves in that direction right now.)
Governments aren’t constrained in the way that they were. If a government decided to print money to bail out the financial sector, there are very few economists who would attack the idea these days. So I would expect that in the context of a crisis, money-printing would be the path of least resistance.
A bail out is much more likely than a bail in, at this stage.
So look, it’s hard to know exactly. There is ambiguity in the legislation and that’s not great. However, it would be a hugely courageous political move to bail-in depositors, and it seems much more likely that the government will simply print money to bail-out the financial sector.
So, I think it’s not something to worry about… at this stage.
(I’ll keep you posted.)
So, look, there’s lot of things to be thinking about and planning around right now. The potential bail-in of deposits is not something I’d be losing sleep over right now.
I hope that gives you some comfort.