Tag Archives: deposits guarantee

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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