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The Efficacy Of Deposit Insurance In The Australian Context

5068 words - 20 pages

The Efficacy of Deposit Insurance in the Australian ContextIntroductionIn 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. 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, 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 BackgroundIn 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. Notwithstanding the near-misses with insolvency experienced by Westpac and ANZ during the early 1990s, there was no desire to follow these countries in this regard given the low rate of actual failure.Historically, Australian depositors have been covered by depositor preference legislation, which states that if an institution regulated by the Australian Prudential Regulation Authority (APRA) becomes insolvent, then APRA can liquidate the assets to pay out depositors under the FCS before being reimbursed for expenses incurred in the administration. Any remaining funds will be first disbursed to depositors above the FCS limit before being used to repay creditors. This provision is strengthened by the fact that the sufficient assets must be held in Australia to a cover to their Australian deposit liabilities.The 1997 Financial System Inquiry concluded that the existing depositor preference laws were more effective, reflecting concerns which mirrored the general literature that the introduction of deposit insurance would reduce incentives to manage and monitor risk. This view was relaxed somewhat in 2005 following a review by the Council of Financial Regulators, which recommended the introduction of a system to provide timely access to funds to depositors and general insurance policy-holders, in light of the hardship caused by the lengthy liquidation proceedings of the general insurer HIH...

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