Time to guarantee Oz bank deposits
Both Ireland and Greece have now moved to guarantee all bank deposits, while the US bailout bill increases the FDIC guarantee to $250 000 for individual accounts at any institution (meaning that anyone willing to hold accounts at four different banks can have $1m guaranteed).
I’ve never seen the merit in the RBA stance of refusing to give an explicit guarantee, while allowing everyone to think that bank deposits are unconditionally safe. I suspect an explicit guarantee will be needed before long, and that it would be better to announce it now, before it is needed.
The quid pro quo, necessary for a whole lot of other reasons in any case, ought to be a tightening of regulation on anything a bank might do that would increase the risk of default. That includes owning high-risk subsidiaries, participating in innovative derivative markets, and taking on off-balance sheet contingent liabilities, among the factors that have contributed to recent collapses overseas.
Updated In the spirit of laissez-faire, I’d be happy to allow for competing unregulated and unsupported deposit-taking institutions. To avoid the danger of moral hazard, I’d require the following
(i) There should be a legislative prohibition on any form of support for these institutions from the government or regulators
(ii) Publicly guaranteed banks should be prohibited from having any dealings (loans, shareholdings, bond purchases and so on) with unsupported institutions
(ii) Customers should be required to sign and regularly renew an agreement stating that they are aware that there is no possibility of a bailout of deposits with these institutions