Big Concerns Over Australian Banks And The FCS
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
