The Efficacy of Deposit Insurance in the Australia Context

The Efficacy of Deposit Insurance in the Australian Context

Introduction

In 2012, the International Monetary Fund (IMF) released their first Financial System Stability Assessment on Australia since the Global Financial Crisis of 2007-09. Despite the positive findings, one high priority recommendation was to convert the current funding arrangements for the Financial Claims Scheme (FCS) to an ex-ante funded scheme.[1] To that end, in August 2013, the then Federal Government announced provisions to impose a 0.05% levy on all small-scale bank deposits from 2016 to protect depositors against the collapse of authorised deposit-taking institutions (ADIs). With this measure being ultimately supported by then opposition and now current Federal Government,[2] the passage of these proposals into law is considered a fait accompli.

However, the efficacy of these measures (known generally as explicit deposit insurance) is the subject of sharp debate between policy-makers and academics. While the former believe that deposit insurance is crucial to saving depositors from failed banks, the latter counter this by citing cases were the introduction of deposit insurance has led to the increased bank risk-taking and moral hazard. This paper seeks to clarify the applicability of this research in the local context, showing that the Australian banking system can be an exception to the global rule.

The Australian Background

In response to the banking crises during the 1980s and 1990s, a number of countries introduced explicit deposit insurance paid for by depositors or the deposit taking institutions.[3] Notwithstanding the near-misses with insolvency experienced by Westpac and ANZ during the early 1990s,[4] there was no desire to follow these countries in this regard given the low rate of actual failure.[5]

Historically, Australian depositors have been covered by depositor preference legislation, which states that if an institution regulated by...