if hbos fails will that effect bankwest guys, page-8

Customers could recover $20,000 if Australian bank collapsesBy Richard Gluyas
March 28, 2008 12:21am


Customers could recover $20,000 if bank collapsed
Commonwealth funds would cover deposits
RBA gives banks a big tick on credit standards

BANK customers would be guaranteed to quickly recover $20,000 of their deposits if their bank collapsed under a plan before the federal Government to retain confidence in the nation's financial system.

The Reserve Bank said the nation's banking system remained robust despite the global credit squeeze caused by the collapse of the US sub-prime mortgage market last year.

But it revealed the nation's peak financial regulators, led by the Reserve Bank, had recommended the commonwealth introduce a scheme to guarantee to quickly repay the first $20,000 of customer's deposits with a bank, building society or credit union if the institution collapsed.

The scheme would involve the commonwealth repaying the failed institution's customers with funds it has on deposit at the Reserve Bank, and then recovering the money by selling the institution's assets.

The move, first considered by the Wallis inquiry into the banking system in 1997 and revived after the 2001 collapse of insurance giant HIH left many policyholders out of pocket, would help protect Australians from losing money in the event of a bank collapse such as the recent failure of Northern Rock in Britain or Bear Stearns in the US.

It would also bring Australia into line with other developed nations. Australia is one of only two countries, the other is New Zealand, in the 30-member OECD that does not have an explicit government guarantee over depositors' funds with banks.

Although the proposal was put to the Howard government early last year, before the current financial turmoil, it is designed to avoid a situation such as last year's run on Northern Rock.

Panicked customers rushed to withdraw their deposits from Northern Rock amid rumours it had been hit by the credit crunch, ultimately prompting its renationalisation by Britain's Labour Government.

The Reserve estimated in its financial stability review, released yesterday, that the $20,000 cap would be sufficient to guarantee the deposits of 80 per cent of customers.

A spokesman for Wayne Swan said the Reserve Bank-chaired Council of Financial Regulators had been considering a financial claims scheme since the HIH collapse.

The council includes the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission, and the Treasury.

"The scheme is currently before the Rudd Government while the council is continuing to investigate a number of technical issues relating to it," the spokesman said.

There is a widespread perception in Australia that bank deposits are government-guaranteed, but the system instead relies on rigorous oversight of banks and other deposit-taking institutions.

The 1997 Wallis committee of inquiry into the financial system did not support commonwealth-backed deposit insurance.

However, Ian Harper, one of the committee members who examined the issue, said he favoured a commonwealth-backed scheme, particularly at a time of "nervousness" about the financial system.

"It would show that, without any crisis on the horizon, the commonwealth is prepared to secure up to $20,000 in deposits per customer," Professor Harper said.

"That would explicitly show that deposits are not guaranteed by the Government, which might be a surprise to some people."

The Australian Bankers Association yesterday maintained its opposition to such a scheme. A spokeswoman said there were benefits as well as costs, and in times of financial difficulty it was hard to stay committed to sound policy principles.

"By guaranteeing deposits, you might be creating bigger problems down the track," she said.

"This was demonstrated in the US Savings & Loans crisis, which was encouraged by deposit insurance that ended up costing US taxpayers around $US140 billion.

"The Northern Rock experience can be viewed as an argument against deposit insurance because it happened while the UK had a formal deposit insurance scheme inplace."