Government sneaks through APRA ‘bail-in’ law

Thursday, 15 February 2018 Update:
The Australian Parliament passed the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017, which gives the Australian Prudential Regulation Authority (APRA) extraordinary powers during a financial crisis, including the possibility to confiscate deposits in order to rescue collapsing banks ("bail-in").

Citizens Electoral Council of Australia

Can anyone clarify what this means for us?
Sounds like in the event of a recession, APRA will be able to call on banks to release funds from customers deposit accounts in order to bail themselves out?

Would this include offset accounts?

 

Has nothing to do with deposits. Deposits are not bank property, they are an asset that is placed with the bank for safeguarding, they are and remain property of the account holder. Deposits are guaranteed by The Australian Government Guarantee Scheme. So if the bank even goes kaput, the scheme protects the money (T&Cs apply).

This basically gives APRA the powers to take over running of the bank. I think they are trying to avoid what happened in the US in the meaning that banks were close to failing yet still were paying crazy amounts to the board and executives, distributing dividends and splashing cash like it is happy times.

If APRA has to step in the first people to lose would be the board and executive, next shareholders.


No advice.

 

It certainly doesn't mean this.

 

Well that’s good, what’s your interpretation of it Terry?

 

Many of our Super Funds, LIC's & individual Aussie investors are heavily invested in the Big 4 banks.
Its a concern imo if things go pear shaped in RE.

 

Just to provide some perspective.

Superannuation Funds currently sit at around $2 trillion of market value.
Let's throw in an assumption that less SMSFs and people who have chosen to invest in Shares directly etc we have $1 trillion that sits in a Balanced option of a Super Fund.

The average Balanced option invests anywhere between 30-50% in Australian Shares. ($500 billion)

The top 20% of any passive index consists of the Big 4 Banks. CBA alone is 8.05%
That means that 20% of $500 billion ($100 billion) is invested in the Big 4 (less those who are holding Direct Shares/ETFs etc through their Financial Advisers/SMSFs)

A large chunk of our retirement money is actually in the superannuation system and invested in the big banks.

 

Seems like a reasonable move to me, to be honest. The chance of a bank needing a bail out if the housing market struggles is not low, and having a plan is probably a good idea.

 

Bail-in legislation means that shareholders, depositors and creditors will take a haircut if a bank gets into trouble, rather than the cost falling on the government.

Individual depositors would be protected up to the government deposit guarantee of $250,000 per ADI. Beyond that, you'd lose some or all of your money. For example, when the Cyprus banks got bailed out (or in), investors lost 50% of all savings held beyond €100,000.

I agree with @highlighter that it's a sensible idea. Ireland's public finances were wrecked by supporting its banks during the GFC.

Incidentally, and this might be a question for someone like @euro73, what would happen to an offset account during a bank failure?

If you have more than $250K parked in an offset, then there's a good chance that the excess might be lost. (I'm assuming that the savings and the loan are treated separately, not as a single item.) In which case, it'd be worth limited your offsets to $250K per institution, and paying down the balance instead. Though that would trade flexibility for security.

 

The trouble with passing this type of legislation is the interpretation of it.

Banks are already notorious for being dodgy and they can stump on customers as is. Putting this sort of legislation in place means the government is washing it's hand of it. Basically saying if the boat went down and you were on it then too bad.

For those who flirt with the idea that this is "good" legislation, can you imagine what will happen if there was even a sign of a recession or depression? people will be taking their entire cash out of the bank for the fear of losing it, leaving the bank high and dry. The stock holders will be selling out. So basically even if the bank wasn't going to go down, it will now I think Einstein was quite right on his theory of infinite stupidity.

 

Havent reviewed the legislation so cant really say... in the event that its a licence to revoke monies above 250K, I guess the answer would be to spread the love around between offsets ...

Lets keep in mind the likelihood of APRA confiscating money from offsets would be extremely extremely minute

 

Isn't the guarantee "per account holder per financial institution" though? Would mean you'd need to have offsets at different banks I guess, or just park it is some low interest bearing account.

 

Thats why I suggested spreading the love around ... I didnt mean offsets at the same bank I meant offsets at different banks....

 

Spreading your money between institutions so that you don't hold more than $250K in any is probably a sensible idea. I see that @euro73 is suggesting it too, and he's usually right.

You'd also want to check on ownership rules. Parking $250K in Westpac and $250K in St Georges might count as $500K in one financial institution. I believe that this is the case in the UK, but I don't know Australian legislation.

I'm probably being paranoid, but it doesn't hurt to be cautious.

 

Does anyone know what happened in Cyprus in the following scenario? I

Say you owed the bank $700k against your house

Say you also had $500k in a savings account, (not offset).

The bank took away 50% of your savings over $250, leaves you with $375k

Did they knock the difference off what you owed them against the house so reduced your debt to them by $125k to $575?

Just curious if anyone knows.

If they took your savings and kept the debt as it was, then for the super paranoid you're probably better not having any savings or offset and pile it all into the mortgage so you always owe them. They can't take what you don't have, (yet).

 

Yes, same as UK here.

 

@Propagate I haven't seen any details on what happened to the Cypriots with a lot of savings and a mortgage.

I'd work on the principle that if a bank implodes, the administrators will treat your savings as separate to your mortgage or loans, and apply the haircut accordingly.

It'd be politically difficult to do this in practice. (Imagine the uproar from people with a significant amount of money parked in an offset.) But it's probably a better to mitigate a potential risk, unless your strategy depends on having access to a large amount of liquid cash.

 

It's a while since I looked at it but the 250K guarantee is only with some accounts. I would check with your bank regarding the offset. This link should help:
Banking | ASIC's MoneySmart

 

Banks, Building Societies & Credit Unions Covered by FCS - FCS

 

Good analysis here:
Sold A Pup – The Bank Deposit Bail-In

Conclusion in the article is "So there you have it. No Deposit Protection currently exists. Its limited to $250k per person if activated by the Government, at their discretion, and the legalisation leaves the door wide open for a New Zealand style of Bail-In. Not a good look."

 

Martin North sounds even more pessimistic than me!

Maybe the solution is:

• Don't have more than $250K in any ADI.
• Spread your money between institutions.
• Consider holding it in other asset classes (e.g. shares), ideally in your own name rather than as a fund.

Ultimately you can't eliminate risk. Some of the plans for the Cyprus bailouts (I'm not sure if they were implemented) would have hit depositors under the EU guarantee.