How Safe is the FCSs $250,000 Guarantee?
How would you feel if you lost all your savings? This became a very real concern for every depositor with funds in an Australian bank when the Global Financial Crisis (GFC) rippled through the global economy in 2007-2008, as governments and financial institutions scrambled to secure dropping depositor and creditor confidence in an effort to maintain economic stability.
Amidst what has been deemed the worst economic disaster since the Great Depression of 1929, the Australian government responded to the Global Financial Crisis with the Financial Claims Scheme (FCS) and depositor guarantees to bolster confidence in the banking system and the security of funds. Though many may have been left wondering – and this is most certainly an important consideration for future crises – how safe is the FCSs $250,000 guarantee?
The FCS was a Lead Balloon
As usual, governments are quite good at giving themselves a pat on the back, such as is the case with the Australian government in relation to its actions during the financial crisis. In their March Quarter 2016 bulletin, in which the Reserve Bank of Australia (RBA) reported on the state of the FCS and the banking sector after the GFC, the government was held in high regard.
Authors made reassuring claims such as the scheme was “successful in supporting confidence in ADIs and ensuring they had continued access to funding during the global financial crisis, and therefore supported financial system stability and the flow of credit to the economy.”
However, set at a cap of $250,000 per depositors under the FCS with a limit of $20 billion per failed authorised deposit-taking institution (ADI), the above claims by authorities lend to the thought that this so called safety-net scheme was simply smoke and mirrors used to create a false sense of stability.
Considering the level of deposits held by the major banks, it doesn’t take much investigating to understand that according to the assurances of the FCS, none of your hard earned savings and investments are safe should history repeat itself and the scheme is activated again.
If you take a look at the latest report by KPMG titled, Major Australian Banks: Full Year 2019 Results Analysis you will see that at the end of the 2019 financial year the major banks reported customer deposits between $300 billion and $600 billion each.
You can only conclude that the $20 billion promised per ADI is nowhere near enough to cover the deposits referenced above. As you can see, the FCS would be lucky to return cents on the dollar and most depositors would be left in the lurch to wait for the government to first recover their funds issued to ADIs before depositors could claim any of their lost deposits against an insolvent or bankrupt institution.
Furthermore, it is important to note that an ADI may encompass more than one institution. This means that even if your savings are spread across multiple banks, if those banks fall under the same ADI then you are only covered for one claim of $250,000 across all your accounts.
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