I was writing up a long piece on deposit insurance in Australia when I read the news that the Federal Government had just moved to guarantee all bank deposits in Australia – meaning the bulk of the text was pointless. I will rescue some of it in this piece – but not much.
With my long opposition to the implementation of such a thing I can only hope that this is a temporary measure. I believe, however, that there is virtually no chance of this being reversed any time soon.
On a personal level, over the next few weeks my reaction is going to be fairly simple. Any surplus cash I may have I am now going to move into the highest possible paying bank account totally regardless of the riskiness of the institution – for the simple reason that risk is no longer any different across any of the ADIs in Australia. This is a totaly ludicrous outcome, but one that has been set up by this change. Provided the institution is APRA regulated I just have to look for the highest rate. This is bad micro-economics.
In short, this move gives an advantage to the ADIs with high risk portfolios and penalises the safe ones. This measure will effectively guarantee a funding stream for any banks that want to play fast and loose with the markets. APRA’s supervision will have to be stepped up to levels reminiscent of the USA. Great. Is this really the outcome that the Government wants?
The other, again rhetorical, question I would ask is whether this will actually make the system any safer. Just have a quick guess as to the stability of those countries with “strong” deposit insurance schemes against those without them. Good examples of “strong” schemes are the USA and Britain – and (drum roll) which countries have had the most problems? The USA, Britain and Iceland. Oh, just in case you were wondering, Iceland had a strong scheme too. Check out this World Bank paper. It simply does not do what it is meant to do.
I do not believe this is going to prove temporary for the simple reason that it would be very difficult to remove any time soon – if ever. Having made the announcement that deposit insurance is in place its removal would cause strong political stresses. Policians, being a spineless lot, will just use any subsequent problems as an excuse to intervene more. That said, many of the more advanced nations that once had full deposit insurance (like Sweden) subsequently reduced the protection – so there may be hope.
I should add that we have now joined those paragons of banking excellence who have full deposit insurance:
- The Dominican Republic