Bail in the new Bail out?

In amongst all the palava and typical political tomfoolery that has dominated the news recently, there has been some quiet angst building in the background centering on the fact that common household savings may now be put in jeopardy in the event of a bank collapsing.

It stems from the recent passage of a bill that effectively widens the Australian Prudential Regulation Authority’s ability to access capital (effectively ‘bailing in’) within an individual bank upon a ‘crisis state’ or in other words upon failure. This change had been picked up by a small political party and whilst they lobbied hard, it appears that due to some crafty timing by the current government the bill has been able to be rushed through.

Now I am not going to get into the political implications, as the bulk of the issue with the amendment appears to be in the wording and intent of the widening. One side has the view that with the current wording, APRA is now able to confiscate consumer deposits and savings to shore up an ailing bank, whilst the other (being APRA) is arguing that the changes are to increase accessibility to broader assets, but still means the interests of depositors are protected.

Elsewhere it is argued that by having the previously installed Financial Claims Scheme, (which guarantees the first $250,000 of all deposits in accounts held in APRA regulated Authorised Deposit-taking Institutions) means that regardless of the new changes, there is still some consumer protection. The counter-argument is that the FCS is an optional scheme that requires the Government of the day to decide to activate if necessary. This flexibility obviously creates a little moral peril for consumers storing savings with major and minor ADI’s (banks), believing that their government will protect them in a potential crisis.

News on the topic is of interest to me because as an adviser, it is generally pertinent to spread the risk of larger client cash holdings across several Tier 1 banks, with the aim of taking advantage of the above FCS and also giving me the ability to go to market for the best rate when term deposits mature.

Whilst broadening APRA’s potential accessibility to my client’s funds does present a risk, I think it is probably also a good idea to take a step back and imagine a situation where such a move might be feasible.

As recent events have shown, there are plenty of options available for a government to swoop in and support a distressed bank without having to go down the politically disastrous path of locking up personal savings. A recent example is Banco Popular in Spain where deposits were saved through early interception and subsequent sale to Santander.  Another was Northern Rock in the UK which was nationalised. 

Outside of the market dominating Big 4, smaller banks would represent pocket change for the majors to hoover up at the slightest sign of distress (similar to BankWest during the financial crisis).

The big four banks we consider too big to fail. If one of these banks ran into trouble the shareholders would be the first to lose money. Next are hybrid holders who would also be likely to lose money. Debt holders may lose money (many didn’t during the financial crisis in European bailouts) depending upon the largesse of the government of the day. Depositors, who are the last in line, we expect would only lose money if the government was suicidal and had decided that they would not like to be in power again.

Of course, the next scenario involves a crisis on more of a national level and is often used to help highlight the peril caused by the recently passed legislation. Contagion and correlation risk, market turmoil and catastrophic collapsing of confidence in the entire financial system leading to the suspension of deposits as banks and regulators madly try to piece it all back together again. Sound familiar? We all know the story but perhaps sometimes forget one of the biggest tools in a government’s arsenal when liquidity dries up, is to just create more liquidity! As the dust settles on the US government’s Quantitative Easing, one of the biggest money printing exercises ever performed, it has shown that depositors can be protected during some of the most turbulent times in recent history.

As a politician, faced with the choice of either calling the Reserve Bank for some money conjuring or allowing APRA to raid the piggy bank of my constituents (an act that would probably seal a political parties fate for generations) it is not difficult to figure out which path would be trodden.

So, there are potential risks that this new bill brings from a local savings perspective. However, it is probably wise to consider the opportunity for it to actually be used to the extent that household savings are affected, given the multitude of tools available before resorting to the (political) nuclear button.