Senate Passes ‘Bail In’ Law – How Safe Is Your Cash Now?

Few would know that very quietly on 14 February 2018, with just 7 senators present, the Financial Sector Legislation Amendment (Crisis Resolution Powers And Other Measures) Bill 2017 was passed into law on a voice vote.  You likely saw no press on the matter and yet the ramifications for all Australians are potentially huge.

This is a very long and complicated piece of legislation but at its very core it brings Australia into line with the ‘Bail In’ agenda of the Bank of International Settlements (BIS) as agreed at the G20 here in Brisbane in 2014.  ‘Bail In’ is about government not bailing out distressed institutions as we saw in the GFC using tax payer’s money, rather using the creditors of the bank to bail itself out.

The legislation allows our banking regulator APRA ‘crisis powers’ to secretly step in and run distressed banks.  It allows APRA to then confiscate and write off certain types of bonds and hybrid securities and allows them to confiscate cash savings of SMSF’s.  Whereas elsewhere around the world, including our neighbours New Zealand, they specifically include the confiscation of depositors’ funds (savings), the Aussie version just cleverly doesn’t specifically exclude that…. 

We’ve written many times of the fact that as a cash depositor in a bank you are simply an unsecured creditor of the bank.  The government tries to make us all relaxed about that through their depositor guarantee scheme up to $250,000 per ADI (Authorise Deposit-taking Institution).  There are traps within as one ADI includes all subsidiaries (like St George to Westpac or Bank West to CBA etc).  There is also a $20b cap per ADI and that may not be enough to cover everyone in that ADI.  The bigger the better is hence counterintuitive as there are more mouths to feed with that $20b.  Timing is another thing.  PPP’s Vern Gowdie wrote just this week about the fact that 90% of deposits are held by just 10% of our financial institutions, or 9 banks in number.  They are the ‘too big to fail’s’ and leave 75 other institutions that wouldn’t cause the chaos of the big guys if it took a while to resolve.  That is where the Financial Claims Scheme (FCS) comes in to play.  From the RBA:

“‘...The FCS is a form of deposit insurance that provides depositors with certainty that they will quickly recover their deposits (up to the predefined cap) in the event that an Australian ADI fails.

‘The FCS is administered by APRA and operates as follows. 

•    The Scheme is activated at the discretion of the Australian Treasurer where APRA has applied to the Federal Court for an ADI to be wound up. This can only be done when APRA has appointed a statutory manager to assume control of an ADI and APRA considers that the ADI is insolvent and could not be restored to solvency within a reasonable period. 

•    Upon its activation, APRA aims to make payments to account-holders up to the level of the cap as quickly as possible — generally within seven days of the date on which the FCS is activated. 

•    The method of payout to depositors will depend on the circumstances of the failed ADI and APRA’s assessment of the cost-effectiveness of each option. Payment options include cheques drawn on the RBA, electronic transfer to a nominated account at another ADI, transfer of funds into a new account created by APRA at another ADI, and various modes of cash payments.’”

So to be clear APRA must first try and rescue the ADI and if that fails it must gain the support of the Treasurer to go to court to declare the ADI insolvent, it must go through the court process, and THEN you get your money “generally within seven days”…

All of the above also assumes some form of order and not mass panic and bank runs as we’ve seen more recently in Greece and Cyprus.

But Australia is different right?  Our banks cruised through the GFC and nothing could go wrong?  Maybe go back and read our article on our bank’s exposure to our property bubble “AUSTRALIA’S $1.7TRILLION “PONZI SCHEME”.  The title is a little ironic after yesterday’s article on Bitcoin too….