Mechanics of deposit insurance back up for debate

The Council of Financial Regulators is considering recommending that banks pay a fee up front for deposit insurance once the current fee-free scheme, which covers deposits up to $1 million, expires.

The collapse of the insurance group HIH in 2001 forced financiers, regulators and the government to address the vague arrangements for depositor protection in Australia.

Recommendations for reform progressed only slowly (and apparently deliberately) in the seven years between then and the onset of the global financial crisis in September 2008 that saw the sudden introduction of a wide-ranging, generous and essentially cost-free guarantee.

Now the Council - a talking shop of Treasury, APRA, RBA and ASIC - is working out how to wind back the current unpaid guarantee. A fee of 70 basis points applies to deposits of more than $1 million.

The Australian reported that the Council is debating whether banks should be made to pay for the cost of insurance upfront.

The previous government's expert adviser - Kevin Davis, from the University of Melbourne - made no recommendation on this point but subsequently said he favoured a pay-later scheme, with any levies designed to refund any aid paid out by the government.

The Council of Financial Regulators Council is also tackling all over again the appropriate cap on any deposit insurance.

Two years ago they favoured a cap of $20,000, as did the new government on their advice.