Australia: Financial Claims Scheme

By June 2008, the Australian government had begun work on the Financial Claims Scheme (FCS), which was meant to protect depositors’ funds (Swan 2008b; Australian Treasury 2008b; Australian Treasury 2008a). By September 2008, the RBA reported that the government intended to guarantee AUD 20,000 and expected to pass the requisite legislation by year-end 2008 (RBA 2008b). The RBA attributed the delay between the announcement and the government’s expected action to the investigation of technical issues associated with the scheme (RBA 2008a).

On October 10, 2008, the Group of Seven urged countries to maintain robust and consistent deposit-insurance systems (G-7 2008). On October 12, 2008, amidst the Global Financial Crisis (GFC), the Australian government officially announced the FCS. The scheme was conceived as a response to actions taken by international competitors (Rudd 2008; Prime Minister of Australia 2008). As initially announced, the FCS provided a blanket guarantee to all depositors with no fee for participation. The government also announced on that day a guarantee scheme for banks’ non-deposit wholesale term funding.

Originally, the government announced that it would provide a blanket guarantee to all depositors with no fee for participation. However, this announcement led to market distortions, as market participants moved their funds into guaranteed deposit accounts (Swan 2008a; Bendeich 2008). On October 22, 2008, Treasurer Wayne Swan said that, due to these market distortions, the Australian government had considered whether to cap the FCS’s free depositor protection.

On October 24, 2008, the government announced that an unlimited deposit guarantee would remain available, but in two parts. The FCS would guarantee AUD 1 million per person per authorized deposit-taking institution (ADI), free of charge (Australian Treasury 2008c). For deposits over AUD 1 million, depositors could be covered under the Guarantee Scheme for Large Deposits and Wholesale Funding (GS), which charged fees for the guarantee (Smith 2020). Both programs were meant to reassure depositors that they would have access to their funds if their banks failed. The government also expressed the intention to compete with countries that had announced similar guarantee programs (Australian Government 2012b).

Also, on October 12, 2008, the government announced the purchase of residential mortgage-backed securities to “benefit Australia’s mortgage market and ensure that this sector of the lending market [had] access to funding for its operations” (Prime Minister of Australia 2008). These purchases lasted until April 2013 and totaled AUD 20 billion (Reuters 2013).

In addition to guaranteeing deposits, the FCS insured general insurance policyholders through the Policyholder Compensation Facility (PCF) (APRA 2009). The Treasury had announced the PCF alongside the FCS’s depositor protections in June 2008 (Australian Treasury 2008b; Swan 2008b). The PCF allowed the APRA to appoint judicial managers to general insurance issuers and to provide policyholders access to funds to meet their insurance claims if their general insurer were to fail. The APRA said that such a facility was in the “interests of policyholders and financial system stability in Australia” (APRA 2009).

The Australian government passed the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Act of 2008 on October 17, 2008. This act created the FCS, authorized the APRA to administer it, and allowed regulators to set the deposit-insurance cap (FCS Act 2008; Prime Minister of Australia 2008). On November 3, 2008, the Treasury set the cap at AUD 1 million, with the cap coming into effect on November 28, 2008 (Banking Amendment Regulations 2008a; Banking Amendment Regulations 2008b). The government proposed the bill on October 15, 2008, and it passed both chambers of parliament without amendments (FCS Bill 2008b). Australian representatives expressed concerns with the bill during debate, such as moral-hazard concerns (Australian House of Representatives 2008).

The Australian government had begun work on the FCS in early 2008 (Swan 2008b; Australian Treasury 2008a; Australian Treasury 2008b). Treasurer Wayne Swan credited much of the FCS’s success to this pre-October 2008 work (Swan 2013). The FCS that was implemented in October 2008, however, differed from that prior plan (Australian Treasury 2010a). For instance, the prior plan would have had an AUD 20,000 insurance cap per depositor; the crisis-time FCS had a cap of AUD 1 million (Australian Treasury 2008b; Australian Treasury 2008c; RBA 2008b).

On December 12, 2010, the Australian government said it would make the FCS a permanent feature of the financial system (Australian Treasury 2010a).

The APRA was responsible for administering the FCS, pursuant to the amendments to the FCS Act of 2008 that the legislature passed in October 2008 (FCS Act 2008; Prime Minister of Australia 2008). The APRA was charged with protecting depositors, ensuring financial safety and efficiency, and promoting financial stability (Council of Financial Regulators 2008). The APRA was also responsible for assessing and advising ADIs while coordinating and communicating with ADIs in financial distress. Policymakers saw the APRA as best suited to administer the FCS. As Australia’s prudential bank regulator, it had the information needed to implement the FCS.

The Council of Financial Regulators, a body comprised of the APRA, the RBA, the Australian Treasury, and the Australian Securities and Investments Commission, was also consulted to “coordinate policy actions aimed at ensuring the safety and efficiency of the financial system” (Turner 2011). The Council was instrumental in advocating for deposit insurance prior to 2008 and was the body that assessed whether the FCS should be modified after the financial crisis (Turner 2011; Council of Financial Regulators 2009). The Council and the Treasury also advised the APRA with respect to the FCS’s implementation (APRA 2009; Australian Treasury 2010b).

The IMF also conducted a report of the FCS and provided several policy recommendations. See the Evaluation section above for a discussion of the IMF’s report.

The Australian government exercised oversight powers over the FCS, determining the extent of its coverage and whether it would be made a permanent feature of the Australian banking system.

On October 12, 2008, the Australian government announced the FCS (Prime Minister of Australia 2008). The Australian government noted that the FCS was meant to reassure depositors in the face of economic uncertainty. Wayne Swan, the Treasurer of Australia, emphasized that the FCS was meant to protect small depositors and ensure that these depositors had access to their funds. Swan also stressed that the FCS was not intended to be a “general deposit insurance scheme” and that the FCS was not meant to shelter large-scale investors from risk, nor burden the banking system (Swan 2008b). Furthermore, then general manager of the APRA David Lewis emphasized that the FCS was not a “compensation scheme,” but rather a means to ensure that depositors could access their funds quickly (Lewis 2009).

The government framed the FCS, along with the other guarantee program, as a measure to ensure that Australian banks could compete with their international counterparts, many of which had benefited from emergency guarantee programs extended by host governments.

Prior to the GFC, in June 2008, the Australian government announced that it had begun work on the FCS, which was meant to protect depositors’ funds (Swan 2008b; Australian Treasury 2008a; Australian Treasury 2008b). By September 2008, the RBA reported that the government intended to guarantee AUD 20,000 and expected to pass the requisite legislation by year-end 2008 (RBA 2008b). The delay in the scheme’s adoption, RBA said, was due to an investigation of technical issues associated with the scheme (RBA 2008a).

According to the Council of Financial Regulators’ Memorandum of Understanding, adopted on September 18, 2008, the APRA was responsible for the communication of its supervisory actions and for the implementation of the FCS, even though the FCS remained unlegislated. The APRA also was responsible for communicating with ADIs, in the event of a “coordinated response” (Council of Financial Regulators 2008). The Treasurer and the Australian government, though, were responsible for communicating with the public about any resolutions, including the decision to exercise the FCS.

On October 12, 2008, when the FCS was officially announced, there was “no limit on the deposits covered” (Prime Minister of Australia 2008). However, due to market distortions and advice from the Council of Financial Regulators, on October 24, 2008, the government decided to cap its deposit guarantee at AUD 1 million, with amounts over AUD 1 million eligible for coverage with a fee (Australian Treasury 2008c; Swan 2008a). Once the FCS became fully operational on November 28, 2008, the FCS guaranteed AUD 1 million per person per ADI, free of charge (Australian Treasury 2008c; RBA and APRA 2009). In March 2009, the FCS covered AUD 650 billion (RBA and APRA 2009). At its peak, in January 2010, the GS covered AUD 166 billion (Schwartz 2010).

On September 11, 2011, the government announced that it would lower the insurance cap to AUD 250,000 per person per ADI, free of charge, effective February 1, 2012 (Australian Government 2012b). A grandfathering provision also extended the AUD 1 million coverage for term deposits that existed on September 10, 2011, until the earlier of the maturity dates or December 31, 2012, and the new AUD 250,000 cap applied thereafter.

During its first three years of operation, the FCS was backed directly by taxpayers: The legislature would appropriate any amount of funds needed to meet depositor entitlements if their bank failed (FCS Bill 2008a). These taxpayer funds would come from the Consolidated Revenue Fund (APRA 2009). After its first three years, the legislation set a limit of AUD 20 billion on the amount the legislature could appropriate to fulfill depositor claims for a single failed bank. The APRA could also borrow, so long as the borrowed assets were channeled into the FCS Special Account.

When exercising the guarantee, the APRA would first draw upon the standing appropriation from the FCS Special Account (APRA 2009). Then, if necessary, the APRA could claim on the institution during its liquidation. If these funds were insufficient, then the APRA would apply an industry-wide fee to cover any shortfalls.

The IMF noted that this ex-post funding scheme could lead to delays in deposit repayment, which could reduce depositor confidence, and that the ex-post fees might contribute to moral-hazard concerns (IMF 2012).

All ADIs, including Australian-owned banks, Australian subsidiaries of foreign-owned banks, building societies, and credit unions, were automatically enrolled in the FCS (Prime Minister of Australia 2008). The Treasury noted that deposit funding was critical for Australia’s small banks, credit unions, and building societies (Australian Treasury 2010a). In light of this importance, the Treasury asserted that without the FCS these institutions would have “had very substantial problems.”

The Australian Treasurer in October 2008 announced that foreign-bank branches would be able to access the guarantee of term wholesale funding and large deposits under the GS; however, they would not be eligible for the free guarantee of deposits below the AUD 1 million threshold under the FCS (Australian Treasury 2008c). The RBA in March 2009 noted that “deposits with foreign bank branches are not guaranteed under the Financial Claims Scheme” (RBA 2009). Foreign-bank branches were not eligible for depositor protections (FCS Act 2008).

The FCS covered all deposit accounts held in ADIs (RBA and APRA 2009).

The FCS guaranteed AUD 1 million per person per ADI, free of charge. For deposits over AUD 1 million, depositors could be covered under the GS, which charged fees for the guarantee (Australian Treasury 2008c; Smith 2020).

Prior to becoming a permanent fixture of Australia’s financial system, the FCS underwent important changes via prudential standards (APRA 2011). For instance, the APRA required ADIs to identify individual account holders more carefully in order to make it easier to confirm depositors’ claims in a liquidation.

As an ex-post deposit guarantee, there were no fees for deposits within APRA’s maximum coverage limits (Turner 2011). A separate, voluntary insurance program for deposits over AUD 1 million did charge a fee (Australian Treasury 2008c). These fees were charged according to an institution’s credit rating, with the lowest fees set at 70 basis points per annum on covered deposits for AA-rated institutions (Schwartz 2010). A-rated institutions paid 100 basis points per annum on covered deposits, while BBB-rated and unrated institutions paid 150 basis points.

The Australian government also had the ability to impose industry-wide fees in the event that payments to deposits exceeded liquidation recoveries on the failure of an ADI (APRA 2009). In the case of an ex-post fee, the levy amount could not exceed 0.5% of an ADI’s liabilities to its depositors (ADI Levy Act 2008a; ADI Levy Act 2008b).

In order to activate the FCS, the APRA was required to receive approval from the Australian courts that an ADI could be wound up (FCS Act 2008). In addition to the court’s approval, the Australian Treasurer was required to approve the FCS’s activation. This would activate the Early Access Facility for Depositors (FCS Bill 2008a). Once the FCS was activated, the APRA would assume control of the ADI.

Afterward, liquidation recoveries would repay the FCS.

The FCS had no additional conditions.^FWhen the Australian Senate debated the FCS, Senator Bob Brown attempted to limit the salaries of all executives of guaranteed ADIs. Brown’s motion, though, failed (Australian Parliament 2008).

When it officially announced the FCS on October 12, 2008, the Australian government said it would review the need for a cap on the insurance level by October 12, 2011 (Prime Minister of Australia 2008). The Australian government in December 2010 said it would make the FCS a permanent feature of the Australian financial landscape (Turner 2011). Changes were made to the FCS in light of its permanent extension. After February 1, 2012, the FCS guaranteed AUD 250,000 per person per ADI, with no associated fee (Australian Government 2012b). The extended FCS also included a grandfathering provision, which extended greater coverage for certain deposits.

The GS closed for new liabilities at the end of March 2010 and guaranteed liabilities until October 2015 (Australian Government 2012a).