How safe are bank deposits ?
A reader writes
‘Im about to assume duties as Treasurer of my local church and have found that our reserves are not diversified but are with one institution already in the news as possibly suspect. The outgoing Treasurer is convinced that bank (ADI) deposits are guaranteed by the Reserve Bank and is resisting diversification. My reading of the Reserve Bank site, the APRA site and the modified Banking Act suggests that this “protection” was done away with by changes introduced by the Howard Government and that the claimed “protection” is an urban myth. Hence could you, or any of the readers of your blog advise – are deposits with ADIs protected in that someone will repay them in the event of institutional failure? and if not what should church (and club) treasurer’s do to protect these investments (many people in my position fail to realise that they can be personally liable for any losses)?
My response is that there is no explicit guarantee of deposits, although there is a strong expectation that the Reserve Bank would protect depositor. Unfortunatley, it is not entirely clear which deposits would be guaranteed, which makes life tricky for people like my correspondent. I don’t think there ever was an ironclad guarantee but it’s correct to say that the changes associated with the establishment of APRA moved us further away from such a situation. Coincidentally, the editorial in today’s Fin discusses this very topic, noting that Costello has been sitting, for the last two years, on a report recommending an explicit guarantee, limited to $20 000. I must have missed the whole thing, as I don’t remember any movement on this issue since the Wallis Committee.
Here are some thoughts from 2002. An extract
the medical insurance panic would be nothing compared to what might happen if, in the midst of a liquidity crisis at a major bank, one of our socially responsible talk-show hosts suddenly discovered that there was no government guarantee for bank deposits. This happened on a small scale in the 1970s, forcing NSW Premier Neville Wran to take a loudhailer into the streets to stop a run on a building society.