The Bank Deposits Guarantee Is No Guarantee At All

15 Mar

Just how much do you trust the “safety” of holding your savings in the bank?

In Think You’ve Got Cash In The Bank? Think Again, we saw that what you believe you have in the bank isn’t really there at all.

According to the RBA’s records, there is only $53 billion in cash notes issued by the RBA in circulation … versus $986 billion in claims on cash (ie deposits) by private customers and non-financial businesses.

In reality, all you have in the bank is electronic digits. Binary code, with your name and an account number assigned to it.

But at least “your” electronic digits in/at the bank are “safe”, because the government placed a guarantee on the safety of bank deposits in the GFC, right?

Wrong.

There is a hidden flaw in the government’s Bank Deposits Guarantee scheme. One which renders the guarantee largely useless.

The Government Guarantee is just another con-fidence trick, to prevent another bank run … like the silent bank run we had during the GFC peak in late 2008.

Richard Gluyas at The Australian has the story of the Great Big Government Bank Deposits Guarantee … that isn’t (emphasis added):

Limited guarantee fuelling deposit war

The intense competition for deposits is not only eroding bank profit margins, it is also maintaining the rage of non-bank institutions offering rival fixed-income products.

These institutions are prudentially regulated, yet they confront a playing field heavily tilted against them by a deposit guarantee that Wayne Swan said last September “protects the savings held in around 99 per cent of Australian deposit accounts in full”.

There is no doubt that the guarantee, reduced last month to a permanent cap of $250,000 per person per institution, has facilitated the stampede into term deposits.

Flows into products like mortgage funds, and even the booming annuities market, have suffered as a result.

But the question is whether the stampede would be slowed if bank customers read the fine print of the guarantee.

How many of them would know, for example, that the standing appropriation to meet any initial payout of deposits is limited to $20 billion per failed bank?

It might seem like a lot, but it pales when compared to about $200bn in eligible deposits for each major bank.

In the highly unlikely event of a major bank failure, any payments under the Financial Claims Scheme would be recovered through the liquidation of the bank.

An industry levy would be applied if there’s a shortfall from a realisation of assets.

But the fact remains that the initial payout is effectively capped by legislation at $20bn, albeit with provision for the government to go back to the parliament for more.

There is no mention of any of this in Swan’s press release.

After reading that document, you’d come away thinking that the government will cough up for pretty much all bank deposits of less than $250,000 in full.

The reality, though, is that the guarantee underwrites an initial payment, which then gives way to other measures.

Maybe it was felt that the guarantee was already too complex without a treatise on the commonwealth’s contingent liabilities.

It was surprising, though, to find there was almost complete ignorance in the wealth management industry yesterday about the “limited” $20bn standing appropriation.

Yet another example of blatant government deceit.

The list is very, very long.

If word really got out in the Australian community, if the truth were widely known about our house-of-cards banking system, and the “limited” nature of the Government Guarantee scheme, good old Mattress Bank would begin to do very well.

Again:

The private banks keep reserves of cash distributed in 60 storerooms across the country with an average of about $35 million in each. They get topped up by the Reserve Bank before Christmas, when demand for cash typically rises by about 6 per cent, and at Easter, when there is a smaller increase.

But in early October, the Reserve Bank started getting calls from the cash centres for more, especially in denominations of $50 and $100.

The Reserve Bank has its own cash stash. It is coy about exactly how much it holds, but it is understood to be in the region of $4 billion to $5bn.

As the Armaguard vans worked overtime ferrying bundles of $10,000 out to the cash centres, the Reserve Bank’s strategic reserve holdings of $50 and $100 notes started to run low and the call went out to the printer for more. The Reserve Bank ordered another $4.6bn in $100s and another $6bn in $50s…

Households pulled about $5.5bn out of their banks in the 10 weeks between US financial house Lehman Brothers going broke – the onset of the global financial crisis – and the beginning of December. That is roughly 80 tonnes of cash salted away in people’s homes. Mattress Bank is doing well, was the view at the Reserve. A year later, only $1.5bn had been put back.

(see Our Banking System Operates With Zero Reserves)

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4 Responses to “The Bank Deposits Guarantee Is No Guarantee At All”

  1. The Old and Unimproved Dave March 15, 2012 at 6:17 am #

    Political cartoonists used to draw Howard with rubber lips.

    There’s a certain irony in that, when you consider that it’s Wayne Swan writing rubber cheques.

  2. JMD March 15, 2012 at 10:06 am #

    “there is only $53 billion in cash notes issued by the RBA in circulation … versus $986 billion in claims on cash (ie deposits) by private customers and non-financial businesses. In reality, all you have in the bank is electronic digits.”

    True but the RBA itself has only electronic digits to back its physical note issue. Its foreign & domestic ‘reserves’ are merely accounts with other central & major global banks. I believe the US treasury no longer issues physical bonds but an electronic form.

    Yet this sleight of hand is enough to see the price of gold fall some 5% in the last week. The can can be kicked further based on ignorance of this magnitude.

  3. Kevin Moore March 16, 2012 at 8:38 am #

    “In reality all you have in the bank are electronic digits.”

    So then in a cashless society if for whatever reason the electricity supply ceases so then does the depositors illusion that they have money in the bank. The benefits of such an event couldn’t come soon enough. .

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