Is your money safe in the banks?

Mar 25, 2020

Welcome to Finance and Fury, the Say What Wednesday edition. This week, two questions – both from John’s about banking system security  -  

First John: I know you’ve spoken about this before, but would be interested to hear about if you think there could be liquidity problems with our banks here in Aus, ie a run on the banks like we have seen on TP etc and in Scotland etc during the GFC. Is our money safe in the banks, or in my case offset accounts with non bank lenders? 

 

Second John:  Just a question I’m relation to bank savings. Do you think our savings ‘Australians’ is at risk of being confiscated if some banks were to collapse? I am aware there are Government Guarantees of up to $250k. But with huge stimulus packages in place and potential many more, would it be possible they wouldn’t be able to guarantee this?  

 

Great questions – Run through –  

1. Liquidity problems – bank runs –  

1. Are your funds in banks safe? Offset accounts - Will the guarantees kick in?  

 

Go into massive detail on a few episodes – a couple of them are called if you want to look them up – back in July 2019 

1. The Cash Bill - stabilising the financial system for negative interest rates, Bail Ins and more, all at your expense 

1. The Governments war on cash and personal freedom continues with the introduction of the Currency (Restrictions) Bill 2019 

1. Financial Reset – Investments to avoid in a negative interest rate world 

 

Human psychology on bank runs –  

1. Recent example of how bank runs occurs – TP – people are worried that there wont be enough – so rush and horde goods – panic buying  

1. But when the cash is yours – want to withdraw it from the bank  

1. What is different now – online banking  

1. Bank runs on cash – banks have other options – capital notes –  

1. APRA has been ready for bank runs – legislated each bank issues billions in notes – fixed interest hybrids that act as capital requirements of tier 2 – based on lending  

1. Then – banks can afford to lend more based on this and require less on deposits  

1. Banks only lose money on the loans – deposits are a liability to them – pay you interest – well not anymore – or in negative rate environments – good deal for banks – 

1. But bank runs might not be that bad – if they are – then can shut down people withdrawing funds, or limiting to an amount per day  

1. The cash restriction bill can mitigate the cash economy and business/government no longer taking cash is having this effect to not be able to use cash 

 

Are banks safe – Depends – may not collapse but may charge you interest to store money with them 

 

Is your money safe in banks - other factors like bail ins and deposit schemes  

According to an IMF paper titled “From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions”: 

1. The language is a bit obscure, but here are some points to note: 

1. What was formerly called a “bankruptcy” is now a “resolution proceeding.”  

1. bank’s insolvency is “resolved” by turning its liabilities into capital. Insolvent TBTF banks are to be “promptly recapitalized” with their “unsecured debt” so that they can go on with business as usual. 

1. This power is statutory. Cyprus-style confiscations are to become the law. Some countries can – ours is a grey zone  

1. A lot of the recommendations have come from the Financial Stability Board – Reformed in 2009 – Background for context 

1. Chairs – Current – former partner of Carlyle Group – Last – 30 years at Goldman Sachs, Mario Draghi – ex Goldman 

1. Current ECB president - member of the Group of Thirty founded by the Rockefeller Foundation. The Group of Thirty is a private group of lobbyists in the finance sector 

1. FSB – recommended that banks raise a “buffer” of securities to be sacrificed before deposits in a bankruptcy  

1. TBTF banks are required to keep a buffer equal to 16-20% of their risk-weighted assets in the form of equity or bonds convertible to equity in the event of insolvency - Called “contingent capital bonds”, or “bail-in bonds,”  

1. fine print that the bondholders agree contractually (rather than being forced statutorily) that if certain conditions occur (notably the bank’s insolvency), the lender’s money will be turned into bank capital. 

1. Just know that most banks alone aren’t able to do that much damage – but when the people working for banks get the authority and executive powers of Governments to socialise the financial system – bad outcome for us  

1. This system is a socialist policy – not free market economics – technically closes to fascist system of Government and business merging/restricted, but without the central planning  

1. Either way – Result – Recommendations for policy which incentivises risk taking, then privatises profits but socialises losses  

 

the end game outlined in the IMF's post – their ideal world — one without cash and to change human behaviours financially to act as ‘homoeconomicus’ – the rational individual that the models require to work – by rational – what they think is the best decision to maximise utility – how most economics works – what would an economist do – most people aren’t economics and don’t do this – nor should they – hard to measure utility across individuals – different values 

1. What behaviours are they trying to promote with negative rates and cash bans   

1. if depositors have to pay the negative interest rate to keep their money with the bank = consumption and investments are more attractive – economic theory says that GDP should go up – jolt lending, demand, etc.  

1. But if rates go lower = people borrow more, and have less cashflow due to paying debts = no consumption occurs 

1. Negative rates then free up cashflow – as your principal repayments start to reduce – spend in economy  

1. Banks don’t need depositors funds as much – savings rates are about 2.8% anyway – due to notes issued as replacements – ones that can be controlled through legislation – easier than stopping people doing a bank run 

1. Just in case – still want to make sure that this reduces in chance of occurring – cash restriction bill  

1. the central banks get greater control to influence your behaviour and economic outcomes. 

1. For those who have faith in monetary policy and central banks, this is no problem - one year on from the banking royal commission, faith in our financial institutions — and the regulators who failed to police the banks' bad behaviour — isn't exactly at an all-time high 

1. Creating a weird world where savers are penalised — and borrowers get paid — upside down 

 

1. Bail in laws –  

1. Offset account – as it is a deposit account – can be used as bail in provision –  

1. Most people with loans would have much more in offsets than savings – or should at least –  

1. But the catch is that all your deposits will likely to be with one ADI – and potentially above the $250k  

 

But how good are government guarantees   

1. Government Guarantees – May not actually help - You have a few problems there: A guarantee only applies to a bank going insolvent and collapsing— with not enough money left over for depositors. Bail-ins (if they are in fact legal) will just take your money to prevent that from happening. That is, the government guarantee won't cover a bail-in. 

1. Guarantees are capped at $20B per ADI – stated in Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008  

1. Activation of the EAFD 1.20 - A declaration outlines the total amount available to make payments to depositors of a declared ADI. For the first three years of the scheme (from 2008), the amount that can be appropriated for the purposes of meeting depositors’ entitlements is unlimited. After three years, the maximum that can be appropriated is $20 billion. The declaration must also outline the amount available for the administration costs for implementing the scheme up to a maximum of $100 million 

1. RBA aware of this - in their “Depositor Protection in Australia” - “Payouts of deposits covered under the FCS [The Australian Government’s Financial Claims Scheme] are initially financed by the government through a standing appropriation of $20 billion per failed ADI [Authorized deposit-taking institutions] 

1. Total size of deposit accounts totalled $2 trillion (Commonwealth Bank — $581 billion, ANZ — $467 billion, NAB— $407 billion and WESTPAC — $533billion). This includes savings, term deposits, chequing, debit card, transaction accounts, mortgage offset accounts, pensioner deeming accounts, retirement savings accounts etc… So only $80 billion (or 4%) out of this $2 trillion dollars is actually covered by the guarantee. 

1. Question remains – once they activate it – where will the money come from?  

1. If the gov is set on debt funding – can get more printed funds to cover the costs  

 

Summary 

Is our money safe in the banks, or in my case offset accounts with non bank lenders? 

1. Bank runs may be hard now and if they start occurring – can be ceased quickly  

1. The effects would be minimal compared to runs of the past with the new funding mechanisms of capital notes by the banks  

1. Non-bank lenders  though - non-banks cannot accept deposits therefore they are not ADIs (authorised deposit taking institutions) - source their funds from elsewhere. These funds are wholesale funds usually from Australian Banks or overseas institutions – Falls under ASIC regulations now APRA – so non banks don’t have the same ‘safety nets’ as ADIs  

1. Do you think our savings ‘Australians’ is at risk of being confiscated if some banks were to collapse?  

1. First step of bail ins would be to use the capital notes to convert into shares (equity) – lowering prices of shares – or to write these off – so the holders of these notes would lose funds but banks would remain solvent  

1. If this fails – may have to do Cyprus style bail ins for deposits – deposits/offset accounts are   

1. Will the Gov be able to cover the deposit scheme? 

1. Govs are printing more to spend isnt the issue – but the maximum amounts allowed under the legislation  

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