This is intended to summarise the several posts over the last few weeks on the current market issues. Let me start by making a few issues perfectly clear:
- No major Australian ADI (authorised deposit-taking institution – i.e. those you can deposit money into) is going to be unable to pay all their depositors their deposits on demand as a result of these issues. None. You are not at more risk than you would otherwise have been.
- I am not aware of any minor Australian ADI that is not going to be able to similarly meet withdrawal requests as and when they are made. There may be a micro institution out there in trouble, but I would be surprised.
- The only ones that may have some problems are the ones that do not take deposits, but rely on wholesale funds. Crucially, these will not the the ones you have deposited any money into. Again, I doubt any will collapse, but even if they did the worst consequence for their retail customers would be that they would have to re-finance their loans, or, if you are a shareholder, you may lose that money. It is unlikely, though.
The reason for this is very simple – the Australian regulator of ADIs, APRA, is very conservative (too conservative in my opinion – but beside the point here). If an Australian ADI was writing a lot of loans similar to the US sub-prime loan they would be stopped from doing so and essentially forced to unwind the loans in some way. I would be shocked if APRA had not noticed an Australian ADI running up these positions as they are normally very close to the regulated entities. The reason I am hedging a bit on some of the smaller ADIs is that there is always the potential for fraud somewhere, but I think it unlikely.
For clarity, the situation at Northern Rock in the UK:
- is illogical;
- will not result in the loss of any depositor funds; and
- is probably terminal for Northern Rock as in independent institution
for fairly simple reasons – and I would refer you to my previous post on this. It is unlikely to be copied in Australia for the simple reason that most Australian ADIs have good deposit bases and are not overly reliant on wholesale funds. In any case, as commenter Asa Mark linked to ( the second link) this market is starting to open up again in Australia as the markets work out that the fundamentals of the Australian economy have not changed and that lending is still as safe as it normally is.
If you are really worried and with one of the smaller ADIs, move to one of the big 4 banks or the major regionals. I would think you will move back fairly smartly though, once you get annoyed by the difference in service levels.