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Connexus : Issue 38
www.abacus.org.au 17 www.abacus.org.au 17 NEWS Abacus has welcomed the federal government’s announcement that the guarantee of deposits in Australian banks, building societies and credit unions has been set permanently at $250,000 per person per institution. The announcement is a vote of confidence in the strength and stability of Australia’s banking institutions, including mutuals. The new cap will apply from 1 February 2012 and there are transitional arrangements for term deposits. The existing $1 million cap for deposits under the Financial Claims Scheme (FCS) was introduced in October 2008 at the height of the global financial crisis and was to be reviewed in 2011. Australia’s financial regulators – the Reserve Bank, the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and Treasury – earlier this year recommended that the cap should be reduced to between $100,000 and $250,000 because the $1 million cap was intended as a temporary measure. They believed that reducing the cap reflected the soundness of Australia’s financial system and that it would bring the scheme more into line with other countries. Abacus argued for a cap at the top end of the recommended range to counter the competitive advantage enjoyed by the four major banks due to their status as too big to be allowed to fail. Moody’s Investor Services has commented that the new permanent FCS is particularly positive for smaller deposit-takers. “ Whilst the FCS raises the level of depositor confidence in all ADIs, the impact is likely to be greater for smaller institutions,” Moody’s said. “The major banks already enjoy a very high level of public confidence due to their size and market presence, which raises the potential for government support. This provides the major banks with a competitive advantage, especially during times of economic uncertainty, as evidenced by their market share gains achieved during the crisis (which were also driven by acquisitions). “ We believe that, whilst the FCS may not automatically raise the level of public confidence in smaller lenders to that of the major banks, it does close the gap and promotes a level playing field for ADIs to compete for deposits,” Moody’s said. Abacus notes that the original $1 million cap was a response to the widespread uncertainty of 2008 when the US and European banking systems were in crisis. “In contrast, Australia’s banking sector – including mutuals – remained robust and strong,” says Abacus CEO Louise Petschler. “Australia has the strongest customer- owned banking sector in the world. We are highly capitalised, and deliver a highly competitive option that is attracting many new members. Customer-owned banking delivers value to millions of Australians,” she says. Announcing the permanent FCS cap, deputy prime minister and treasurer Wayne Swan said Australia would continue to have one of the most generous and secure deposit insurance schemes in the world. “Australia’s credit unions, building societies and banks are highly capitalised and have benefited from years of tough supervision by our world-class regulators,” the treasurer said. “Our institutions are very soundly managed by international standards, having developed strong practices of responsible lending and risk management. They are very well funded for the period ahead, and have significantly reduced the amount of funds they borrow offshore as they move to more stable, longer- term funding. “Given the fundamental strength of our banking system, and its very sound positioning to meet new Basel III global regulatory reforms, our financial regulators have advised that it is now appropriate to adjust the settings of the FCS. The new cap will apply from 1 February 2012 subject to the continued advice of our financial regulators that this remains appropriate,” the treasurer said. Existing term deposits continue to be covered at the current level until 31 December 2012, or until the deposit matures, whichever occurs sooner. This arrangement will apply to term deposits which existed on 10 September 2011. If those term deposits mature before 1 February 2012 and are rolled over, then the new $250,000 cap will apply from 1 February 2012. For term deposits that mature after 1 February 2012 and are rolled over, the new $250,000 cap will apply from the rollover date. – Luke Lawler is a senior manager, policy and public affairs, Abacus Deposit guarantee set at $250,000 The new deposit guarantee applies from 1 February 2012. By Luke Lawler