Big Concerns Over Australian Banks And The FCS

Big Concerns Over Australian Banks And The FCS

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I'm Sebastian St James. I'm worried  that the banks will fail. Are there   any guarantees to protect me? This  is a concern of one of my viewers. "Hello Sebastian, loving  you nonsense information." "Thank you." Based on something I'm about  to reveal about James - yes,   that's right. James has a secret - I  think he may be trying to say this:

"Hello Sebastian, loving your  no-nonsense information. Thank you." Oh, we'll never know. "So many questions first, should we be worried  about the bank guarantees? Number two, is there   a way of contacting you direct? Cheers James" James has signed off. But  then he immediately continues.

"...should I convert my US dollars  into Australian dollars. I have   a Schwab account however I watch a lot of  YouTube USA seems a bit of a worry.. WDYR?" Which stands for 'what do you  reckon'. All the cool kids are   saying that. James's question  boils down to the following. 1) Should we be worried about the bank guarantees? 2) Is there a way of contacting you directly?  3) The US is a bit of a worry. Should I  convert my US dollars into Australian dollars? Right. That secret that I  know about James. Here it is.

James is one of my channel members. Thank you, James, for supporting the channel. And if you'd like to support all  my good work on this channel,   like James, hit the join button below.

Let's take them one at a time. [woosh] "should we be worried about the bank guarantees?" In Australia and in the US, we have two systems  that are fairly similar, actually. And they   protect depositors when they place their  monies in normal banks. Well, what are they? In the US, your bank deposits are protected  by either the Federal Deposit Insurance   Corporation, which is the FDIC. Or the  National Credit Union Administration, which if you're not American, you've probably  heard of the FDIC. But the second one,   probably not so much. But it's an either-or.

In Australia, we have the Australian  Government guarantee on deposits. This refers to the Financial Claims Scheme, the  FCS, which provides protection to depositors of   up to $250 000 per account holder per authorized  deposit-taking institution or ADI. Bank,   building societies, or credit unions,  in the event of the ADI failing. For   joint accounts, each account holder  is entitled to a $250 000 guarantee. Oh! Well, that's a lot of  information. Let's break that down. So, the Australian Government guarantee on  deposits is called the Financial Claims Scheme,   or the FCS. It protects depositors of up to  $250 000 per depositor. So, $500 000 for a joint  

account. I'll explain that more in a minute. Per  ADI, the authorized deposit-taking institution.   What is that? I'll explain that in a minute. And  it triggers if the ADI fails, and not unless. So, what does Moneybags Michael think  about this? Who's Moneybags Michael? This is Moneybags Michael. [crowd exclaims, "Whoo!"] He has in the Australian Bank of Fat Cats,   two accounts. Account number one has $200 000  in it. Account number two has $200 000 in it,  

but it's a joint account with his wife. In  his second bank, which is the Tycoon Bank of   Australia, he has $200 0000 in an account. In his  third bank, which is the Yodeling Bank of Austria,   he has $200 000 in an account there. So, imagine  that they all go bust: bang, bang, bang, bang!  

What happens then? How does the FCS step  in, and what protection does Michael have? In bank number one, straight away, the  first two hundred thousand dollars is   protected. Account number two is joint  with his wife. What does that mean? Under the FCS system, joint  accounts are split exactly in half. So this is seen as a hundred thousand for Michael;  a hundred thousand for his wife. Straight away,   his wife gets fully protected for her 100k. But  Michael, who's already used up $200 000 on account   number, one has only got $50 000 left because it  caps out at $250 000. Therefore, of account number  

two, 50k is protected. And 50k is unprotected,  which means he would not get that back. Oh, well. That's a shame.  What will the fat cat ever do? In the second bank, the Tycoon Bank of Australia,  he gets back all the two hundred thousand dollars.

But hang on. Hasn't he used up 250k  already? Yes. But that's with bank   number one. This is bank number two. Totally  unrelated. Therefore, he can start again. In bank number three, The Yodeling  Bank of Austria, he gets nothing back! Oh, that's a bit unfair! Why not? The reason is,  it's not an ADI, an Authorized Deposit-taking   Institute. It is an Austrian bank that  happens to have a branch in Australia,  

but it's not actually an Australian bank.  And it's not actually registered through the   Australian system. Therefore, no protection  for you. So, we've learned the following: Joint accounts are split  equally. FCS applies per bank,   not per account. And FCS only applies to ADIs. Is my bank an ADI? Like, how would I  even know? Well, ADIs or Authorized   deposit-taking institutions, most banks,  credit unions, and building societies in   Australia are ADIs. But they do need to  be registered with and governed by APRA.

APRA? APRA who? "The Australian Prudential Regulation Authority is   an independent statutory Authority that  supervises institutions across banking,   insurance, and superannuation and promotes  financial system stability in Australia." Wow! Everything you could possibly want to know   about APRA in one sentence.  So let's break that down. APRA is a statutory authority. A statutory Authority means it's  established through legislation or statutes. Its purpose is to promote the financial  system stability in Australia. Well,   that's good news. That means it's the perfect  place to handle depositors' insurance.

Because protecting depositors' money goes a  long way to promoting financial stability in   Australia. But remember, with Michael, there  was one bank where he was not protected. That's right. That's with  the Yodeling Bank of Austria. Well, with banks coming in and out of  Australia: the HSBC, the Bank of England... No,   you don't get to deposit in the Bank of England.  Too bad. You should be able to. ...Charles Schwab,  

this bank, that bank, we know they're not  Australian banks. But are they actually a   part of the ADI system? How would I even know?  If your bank is not dinky-di and didgeridoo,   then perhaps you should check on their website.  Or even better, actually go to the regulating   authority, APRA, and check on their website.  So, that's exactly what I've done. This is   probably a YouTube first. Here are all the ADIs in  Australia, as of the 1st of September this year. And there they are. You can pause, zoom in,  

and have a look. Make sure that your bank or  building society or credit union is on there. If it's not, you've got some questions to  be asking. Let's say I restrict myself to   only banking with ADI, which is a good idea if  you're in Australia. If something goes wrong,   who do I turn to? What protections do  I have? Well, you need to know what   protection the FCS actually provides to you,  and what it doesn't provide to you, equally. The Financial Claim Scheme will protect  you if your bank fails up to $250   000. It won't protect you in the case of credit  card fraud. That's up to the bank to handle. It  

won't protect you if your identity is stolen and  bank loans are taken out in your name. Once again,   that's between you and the bank. And it  will protect you with general insurance. Hang on. What's that last sentence  you're stuck in about insurance? So, the FCS will protect you for up to five  thousand dollars for general insurance. Higher than 5K, you'll actually have to go through   their process and find out whether you're  eligible. The 5K is guaranteed. The rest,  

well, they haven't exactly laid  out what their criteria are. And APRA pays once the  government activates it to do so. Right. Good so far. Now, what  types of accounts are protected? The FCS protects account holders which are: an individual;  a body corporate (that is a corporation  or proprietary limited company);  a body politic; a partnership;  any other unincorporated  association of bodies of persons;  the trustees of a trust; the trustees of a superannuation fund   (including a self-managed superannuation fund); the trustees of an approved deposit fund. But, what happens if I'm not actually  an Australian citizen? Let's say I was   born in New Zealand. I've actually moved  across the d'tch about 20 yeers ago. But   I've actually not taken up citizenship?  Am I protected by your fancy ADI scheme? The citizenship or residency status  of an account holder does not have   an impact on whether a deposit  account is covered under the FCS.

Right. So, I can take my five hundred  thousand dollars. I can split it between,   say, Bankwest and Commonwealth Bank and  I'll be protected, right? No, you won't. "It's important to note that some ADIs market  themselves under more than one brand or trading   name. For example, Bankwest is a part of  the Commonwealth Bank, whilst St George   is a part of Westpac. Some banks also offer  accounts under the name of a different company,  

such as subsidiaries of the ADI. For example,  deposit accounts offered by RAMS are actually   Westpac accounts. Some accounts may be branded  or marketed under the name of a third party,   such as Bank of Queensland offering accounts  under "Virgin Money Australia" or National   Australia Bank offering  accounts under the "Citi" name.

So, a depositor might think they have  accounts with two different banks when   both accounts are actually the same institution." Deceptive. But that's how the system works. Any  ADI can have multiple sub-banks. Well, how do   I know who owns who? Buyer beware. That is your  responsibility to know. Okay. So, if I'm not rich,  

but let's say I get a lot of money because I sell  my house. I've got a million dollars in the bank,   just temporarily while I'm moving to my  new house. Will that be protected? I mean,   it's only there for like a week or two.  Surely I'll be protected. No [chuckles] The FCS limit of $250 000 applies irrespective  of the source or purpose of the funds,   or the period for which the funds were intended  to be held in an account. For amounts above $250  

000, no additional protection  is offered under the FCS. So, you may be homeless if your bank goes  bust at the exact moment after you've just   sold your house, and you're ready to buy  the new one. So, what do you do? Well,   you could take your house money  and split it up over several ADIs,   and make sure there's no more than $250 000 in  any particular bank. That's probably the sanest   thing to do. Don't stick it in the share market  if you're going to buy a house in less than,   say, about five years. Bonds? Well, they could  go backwards as well. So stick it in the bank,  

but do break it up. Now, banks have lots  of different sorts of accounts. Obviously,   you have your normal savings account,  your normal transaction account. But then,   banks have sort of weird accounts. How do I know  which ones are protected and which ones aren't? The FCS protects the following:  savings accounts, term deposits,  transaction accounts, debit card accounts,  mortgage offsets accounts, cheque accounts,  trustee accounts, personal basic accounts,  cash management accounts, farm management accounts,  call accounts, current accounts,  pensioner deeming accounts, and retirement savings accounts. Wow! That's every account a bank would  possibly have, right? No, not quite.

So the ones which aren't protected by the FCS are: accounts with foreign funds in it,   so not Australian dollars; accounts kept at foreign branches   of Australian banks building societies or  credit unions that are located overseas;  credit balance on credit card  facilities or other loans;  prepaid card facilities or other similar products;  Nostro accounts and Vostro accounts  are foreign corporations that carry   on banking business or otherwise provide  financial services in a foreign country. That's the banking side. Now,  we mentioned the insurance,   and how you're protected up to a whopping  five thousand dollars. What happens, like,   if you have a bingle and your car hits  another one, and you just bought your   car last week? Five thousand dollars  is not going to go very far. I'll put  

that to you. But what sort of insurance are  you protected against, and what aren't you? The Financial Claim System covers some  insurance policies, but not all. It is   designed to protect policyholders with  a general insurance provider. However,  

life insurance and private health insurance  companies are not protected under the scheme. So car insurance, house and contents, those  sorts of things should be protected. But, yeah,   life insurance and health insurance, not so much.  Oh, I know. What about my mortgage offset account? "Mortgage offset accounts that  are separate deposit accounts   are covered under the FCS. However,  mortgage accounts with withdrawal   facilities that are not separate deposit  accounts are not covered by the FCS."

Okay. Let's say I'm financially disciplined,   and I've paid ahead on my loan. I may be  six months ahead. What happens if my bank   goes bust? Am I protected? Well, yes and  no, in equal amounts. But I'll explain. "Additional or advanced repayments against a  loan or mortgage are not covered under the FCS,   as they are not a deposit in a deposit account." Fair enough.  "However, in the unlikely event that  the failure of a bank or building   society or credit union otherwise known as an  authorized deposit-taking institution or ADI,   the additional repayments would not be lost,  as they would reduce the balance owing on the   loan or mortgage. The outstanding balance of  the loan or mortgage would then be transferred  

to another ADI or lender, a bridge bank, or  sold to the liquidation of the failed ADI.   The borrower would receive instructions  for making repayments to the new lender. If you've paid down, well, you've paid  down. You don't have to repay. I know,   what about self-managed super funds? "The trustee of an SMSF that holds a  deposit account for that SMSF with a bank,   building society, or credit union, is treated as  an account holder under the FCS. Where an SMSF  

has a number of individual trustees, the trustees  are collectively treated as an account holder. The   $250 000 limit applies in relation to the SMSF  as a whole. The FCS protection is extended to   the trustee (or the individual trustees together)  for the benefit of all the members of the SMSF. So, essentially, your self-managed super fund  is considered to be one entity. [chuckles] It's  

one protection. That's it. Now that  we're all experts on the FCS system,   the Financial Claims System, let's go back  to the original question and answer that. "Should we be worried about the bank guarantees?" Personally, I feel completely relaxed  and comfortable about the bank guarantees   that the Australian Government actually offers  through APRA. But let me break it down for you.

Firstly, is Australia a banana  republic with a shaky economy? The answer is no. It's the 13th-largest  economy in the entire world. So, the chance of Australia going under and  having problems with massive inflation which   goes up to 200% a day, and the government getting  toppled by the military, say, very, very unlikely. Is it in the Australian Government's  best interest to make the general bank   depositing public feel safe? Yes.  They need to win the next election. Could the government ever afford an FCS payout? I think this is partly behind  the fear. Question number one:   would they actually do it? Would they  pull the trigger and protect you? And   question number two: could actually  they afford to? I can answer that.

Well, here's the Australian national debt.  Oh, interesting. It is 54.84% of GDP. But what is GDP in Australia right now?  That is 1 204.62 billion US dollars. Why is Australian debt in US dollars?  It's not. It's in Australian dollars.  

But it's been converted to US dollars on this  chart. Oh! So, I'll have to convert it back. Let's go. The Australian GDP  is 1204.62 billion dollars.   Take 54.84% of that, which gives  me 660 billion US dollars. Now,   convert that to Australian dollars,  which is one trillion Australian dollars.

An awful lot. A trillion, or a thousand billion,  is what the debt is at the moment. Presumably,   the government is able to pay that off. But  what happens if a bank collapsed? How much   would they have to pay, say, relative to the  national debt? Because that would give me an   idea of whether they could cope with it or not.  This was a difficult challenge for me! I had to  

trawl through report after report to find out how  much actually banks have of depositors' money. But   I did it. I picked the Commonwealth Bank. I've  zeroed in and got that figure. So here it is. The Commonwealth Bank, as of their last report,   had 310 billion dollars in household  deposits. That's the figure right there. Oh! Well, that sounds like a lot. How much  was a debt, again, in comparison to that?

The current debt of Australia is 1 000  billion dollars. The CBA deposits are   310 billion dollars, and I've added  the zero for clarity so they line up. So, yes, if the Commonwealth Bank was to go bust  tomorrow, the bank could actually be bailed out by   the Australian Government. Because it's already  holding a debt which is actually a factor above   that in size. Mind you, the 310 would not all have  to be paid out. If there are any accounts over two   hundred fifty thousand dollars, they don't have to  be paid out. So it's the maximum of that amount,   not the actual amount, necessarily. That answers  the question: can the Australian Government pay  

if a bank goes under. I picked the Commonwealth  Bank because it's the largest bank in Australia,   and everything else is smaller than that. So,  that was a good place to look. But the other   question about whether the Australian Government  actually would pay has already been answered. "The only time the FCS has been activated  to date was for the failed general insurer   Australian Family Assurance Limited in  2009. As a result, 29 (a whopping 29)   payments were made to affected policyholders  and third-party claimants covered by the FCS.

So the Australian Government has actually bailed  out and used the FCS in the past. And presumably,   it would do it again. The other very important  thing here. APRA is the regulating authority   for the banks. They actually do stress tests with  the banks, which goes something like this. We're   looking at the economy, now. We think say jobs may  be lost. And therefore, people can't repay their  

mortgage over the next, say, 6, 12, or 18 months.  So, we now declare that you actually have to hold   a larger percentage of your loans in cash, or  in reserves of some sort. Can you cover that?   Do the stress test. No, you can't. You now have to  retain more deposits. So, every six months or so,   APRA is making sure that the banks are financially  stable. And if they're not, it quickly whips   them into line. This dramatically decreases the  chance that any of our banks would ever go under.

Let's say, though, that the FCS system  is activated. Who actually pays for this? "If the government activates the FCS, initial  FCS funding will be provided by the government   in order to facilitate timely payments to  account holders. Amounts paid under the FCS   and associated administration costs would  then be recovered through the liquidation   process of the priority claim. Any  shortfalls through the liquidation   would subsequently be recovered by the  government through an industry special levy.

So, the government has a disaster. It bails out  the people of the bank. And that it applies a   levy to all the banks from then on in, until  it gets their money back. So that's how it   works. That sounds like a good system to  me. All right. This is good. But how quickly   do I get paid? Like, do I have to wait a  year or something? No! It's much quicker. "In the unlikely event that the FCS is activated  by the Australian Government, APRA has plans and   protocols in place to ensure the timely payment  of depositor funds or policyholder claims. For  

example, APRA will endeavour to make payments  to the majority of deposit holders within   seven calendar days. In most cases, FCS  payments would be made either by cheque..." By cheque? What are we? 1980? "...or electronically to an alternate account  nominated by the account holder. If the FCS   is declared, APRA and the entity will be  communicating directly with depositors or   policyholders on any steps that need to be  taken in order to access the FCS payment.

So, James, personally, I think the Australian Bank   guarantee is solid. And I would  not lose a wink of sleep over it. So far, we've answered the following question:  should we be worried about the bank guarantees?   The answer is no. That leaves us with two more  questions. But unfortunately, we're out of time. So, I will come back in two videos time and  answer the remaining questions. Make sure  

you're subscribed if you want to hear what's going  on there. Do you know that Australian pensioners   are much worse off today than they were when I was  growing up? Is that true? Click here to find out.

2022-11-15 15:16

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