Deposit insurance decision needed

One topic unlikely to receive an airing over the two remaining weeks of Australia's general election is the need to review the current $1 million threshold on the deposit insurance system rushed in at the height of the global financial crisis a little under two years ago.

While proposals for deposit insurance - styled by Australian regulators as a financial claims scheme - limped along for much of the 2000s, decision makers were forced to make fast decisions in October 2008 as the shockwave from the collapse of Lehman Brothers wrecked confidence in the banking systems of Europe and the United States.

Thus depositors in banks, building societies and credit unions now enjoy an explicit Australian government guarantee on deposits of up to $1 million. Regulators and banks had preferred to leave the question of implied guarantees ambiguous before this.

Neither banks nor depositors pay a fee for this insurance.

Fees do apply on a complementary guarantee scheme on deposits of more than $1 million, and which parallel the fees that apply to wholesale liabilities. The government cut off access to the guarantee on large deposits in March 2010.

While the retail deposit scheme continues, for new deposits, until October 2011, the new government will probably need to make a policy decision on the threshold by the end of this year.

One industry lobby - Abacus, which represents mutual credit unions and building societies - wants the government to extend the $1 million guarantee threshold (in practice making it permanent).

The Australian Bankers Association does not yet have a view on where to take the scheme.

The Council of Financial Regulators at one stage favoured a cap on deposit insurance of $50,000, though the government adopted a lower cap of $20,000 in response to lobbying by big banks when the outline of the financial claims scheme was first announced in June 2008.

Depositors last lost money in Australia in 1990 with the collapse of Pyramid Building Society, an event that triggered two waves of reform of regulation of smaller deposit taking entities, which ended up under the umbrella of APRA in the late 1990s.

It took the failure of HIH Insurance in 2001 to generate the policy review process, as well as prodding by the International Monetary Fund in the mid 2000s, to devise the present financial claims scheme.