IMF Says Rudd’s Depositor Guarantee Scheme “Increases Moral Hazard Greatly”

25 Jul

It’s yet another Rudd Labor disaster, just waiting to happen.

According to the IMF’s November 2012 technical note, Australia: Financial Safety Net and Crisis Management Framework, page 26, not only is there an “extreme concentration” in our banking system; the Financial Claims Scheme (FCS) introduced by the Rudd Government in 2008 “increases moral hazard greatly” –

Australia: Financial Safety Net and Crisis Management Framework. Source: IMF (click to enlarge)

Australia: Financial Safety Net and Crisis Management Framework. Source: IMF (click to enlarge)

Why so?

The IMF says that, unlike “most” similar schemes elsewhere, the Rudd scheme does not require the banks to make any contributions towards pre-funding of the guarantee. The responsibility for funding it, falls on the government. Meaning, the taxpayer.

Indeed, the IMF points out that the government may need to increase the public debt limit above the present $300 billion ceiling, if payouts under the scheme became necessary –

Click to enlarge

Click to enlarge

The IMF’s suggested solution to this “moral hazard” problem, is to make the banks pay “premiums” towards a “reserve fund” that could be used to support payouts under a depositor guarantee. However, the IMF also notes that even if a requirement for premium contributions was established, Australia’s banking system is so highly concentrated that “it may be difficult to establish a fund of sufficient size that the deposit guarantee would seem credible”

Click to enlarge

Click to enlarge

When you pause to carefully think this through, merely forcing the banks to pay a premium contribution towards a depositor claims reserve fund is really a rather ridiculous non-solution to the highlighted problem of moral hazard. It is analogous to charging an insurance premium for a policy that promises to pay for the ticket if the banker gets caught speeding –

121807_2025_MoralHazard2

We have recently seen the evidence in the Portfolio Budget Statements (page 134) for Budget 2013-14 that the government is now well-advanced in preparations for a Cyprus-style “bail-in” of our banks.

We have also seen the recent warning by Moodys ratings agency that our banking system has the world’s highest exposure to mortgages, and so is vulnerable to collapse if house prices fall.

Combine this with the IMF’s warning about Rudd Labor’s rushed and bungled depositor guarantee scheme that “increases moral hazard greatly”, and it is increasingly clear that I will soon have to redraft the debt trajectory chart on the masthead of this blog.

It only goes up to $300 billion.

See also:

The Bank Deposits Guarantee Is No Guarantee At All

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7 Responses to “IMF Says Rudd’s Depositor Guarantee Scheme “Increases Moral Hazard Greatly””

  1. gusgrunt July 25, 2013 at 7:53 pm #

    One would consider that we taxpayers, the collateral against the debt of our governments, should have a say.
    One should also wonder who was the most destructive….. Kev or Julia.
    One should also consider…. how can any concerned person trust the IMF and it’s partner in crime…… the World bank.
    As a matter of fact….. how the hell can you trust anybody?…… just a thought…..Gus

    • The Blissful Ignoramus July 25, 2013 at 8:01 pm #

      “how the hell can you trust anybody?”

      If they’re in a position of any power .. or aspiring to be .. then you can’t. Wisdom and commonsense forbid it.

      • gusgrunt July 25, 2013 at 8:39 pm #

        Lord Acton who was, in part, active in the establishment of the ‘privatized’ Bank of England gave us some important advice in a quote he offered over a century ago.
        “The issue that has swept down the centuries and which will have to be fought sooner or later is the people Vs the Banks”.
        Acton, as far as I know, coined the phrase…..
        ‘power corrupts’

        My problem with psychopathic political power is that they must sell their souls to gain mercenary benefits from a greater power that they do not understand.
        Woodrow Wilson sold his soul and in later life regretted his sale.

        “Since I entered politics, I have chiefly had men’s views confided to me privately. Some of the biggest men in the U.S., in the field of commerce and manufacturing, are afraid of somebody, are afraid of something. They know that there is a power somewhere so organized, so subtle, so watchful, so interlocked, so complete, so pervasive, that they had better not speak above their breath when they speak in condemnation of it.”…… Woodrow Wilson.

  2. Kevin Moore July 26, 2013 at 4:41 pm #

    You’ve got to smile every now and then –

    Julia Gillard – I Dreamed A Dream i Wednesday Night Fever

    • gusgrunt July 26, 2013 at 7:04 pm #

      Martin Luther also had a Dream

  3. Neutral July 27, 2013 at 4:38 am #

    How are you blaming “Rudd’s Policy” , if the G20 forced all G20 member nations to implement this policy? BarnabyIsWrong!!

    • The Blissful Ignoramus July 27, 2013 at 10:52 am #

      You are mistaking two different things here. Firstly, this post — The G20 did not force Rudd to implement a depositor guarantee scheme, much less a flawed one. Secondly (and separate issue, in different posts), the “bail-in” of banks is something the G20 member nations agreed to; there is not “G20” separate to the G20 member nations that made them agree to it.

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