Aussie Bank Bail-In – Risk v Reward

We have endeavoured to keep you abreast of the apparent government agenda to keep your money in the banks whilst allowing the banks to take it via a bail-in and prevent you using it via cash bans.  Back in July last year we wrote the news piece titled “Bank Bail-Ins In Australia – Why Your Cash Isn’t Safe” which itself gives a link to our original article in 2018 when the bail-in laws were quietly passed.  That 2018 article has now been read by over a quarter of a million people.  In the article last July we outlined a legal opinion on that bail-in legislation and the clear ability of APRA and the banks themselves to act on the seemingly deliberate legal ambiguity to take your deposits.

Yesterday ABC News ran the analysis piece titled “Coronavirus crisis heightens fears bank deposits could be wiped out under 'ambiguous' laws” which gives both sides of the story and refers to that legal opinion we outlined above.  It pointedly starts as follows:

“Imagine you woke up one day to find your bank account had been wiped out.

Your entire life savings has evaporated overnight, but not because some anonymous fraudster had stolen it.

It happened because the very banking institution that regulators have repeatedly told you is "unquestionably strong" has faltered.

The bank has taken your deposit and converted it into shares to ensure its own survival.

You now own those shares, but you've taken on more risk than you signed up for, and there's a possibility those shares could end up being worthless.

This is a scenario of a bank moving to 'bail-in' your money.”

The article goes on to describe how unlikely a bail-in is.  The word ‘unprecedented’ features prominently in any economic article written in recent times.  Many of the things happening right now would once have been described similarly as very unlikely.  Our article yesterday talked to the abundance of economic known unknowns via one of the most respected investors in this country.  What it didn’t cover is the unknown unknown’s.  These are still a ‘thing’.  They are the so called black swans that something like COVID-19 is.  Whether known or unknown unknowns, there are still too many issues around to say “she’ll be right” when it comes to Aussie banks.  As we wrote earlier this week, they are deeply, deeply exposed to the Aussie property market with plenty of question marks hanging over it per se and how they exit the mortgage holiday phase on top of that.  Add business debt to that when we enter the insolvency phase of this crisis and there is certainly pressure ahead.  Will it be enough to trigger bail-in’s is anyone’s guess and on balance it still belongs in the unlikely camp.  The question remains about the risk v reward of ‘unlikely’ and your life’s savings.

We continue to see high net worth individuals getting their money out of the bank and into gold for this very reason.  These are not ‘gold bugs’ but rather people who have amassed a large amount of savings over a lifetime of generally good decisions. They are unemotionally assessing the risk reward equation.  The reward side of the equation sees the bank paying next to no interest and the RBA confirming that will be the case for years to come and many stating we will even join the negative interest rate trend.  For the reward on gold we are in a very rare period where nearly every analyst from big bank CIO’s, to economists, and journalistic commentators are all bullish gold, and that is despite it being up 20% year to date already.  Compare that to your 1.5% locked away on a term deposit…. 

On the risk side we have the government ‘guarantee’ limit of $250,000 per ADI (that combines say Westpac and sub St George as one ADI, or CBA and sub BankWest as one ADI, etc).  We then have the prospect of the bank acting pre-emptively (before you can even get that $250K) regardless as discussed in the ABC article.  Inflation looms large too, where inflation gets away at a higher rate than your interest rate, literally driving you backwards when gold ordinarily thrives.

The amount of cash being hoarded should not be a surprise.  Those ‘lucky’ enough to have a large cash surplus are faced with few logical alternatives.  Shares are sky high in a recession and property is facing challenges of immigration, surplus stock and forced sales post mortgage holiday. Buying bonds when we are zero bound is becoming more and more questionable.  The allure of the ‘safety’ of even just 1.5% in the bank can’t be ignored.  The problem remains then, what is 1.5% of nothing?

You can read the full ABC article here and make sure you click on the 2 links (to cash ban and wealthy withdrawing deposits) toward the bottom.  It is best to read our July article first to acquaint yourself with the legal opinion it discusses.  Then when reading it, ask yourself, if it is such a non-issue, why argue so much and just change the law to remove the ambiguity.  I’d suggest it’s the same reason the bill was so quietly passed in the first place.

Shakespeare put it nicely once… “The lady doth protest too much, methinks”…