Australia’s Authorised Deposit-taking Institutions (ADIs) are quietly taking action to prepare for a potential bail-in of retail bank deposits if a domestic or global financial crisis were to occur.
In recent weeks and months, several Australian ADIs have issued new terms and conditions (T&Cs) for both retail individual and business deposit accounts. Many of these changes have been implemented without much fanfare and in some cases with insufficient notification to customers.
Moreover, in some instances, the implemented changes by ADIs to their retail deposit account T&Cs are dramatic and reveal an underlying intention to manage risks relating to liquidity and credit worthiness beyond what is openly admitted to either by:
the Federal Government and Federal Parliament;
federal economic regulators such as the Reserve Bank of Australia (RBA), the Australian Securities and Investment Commission (ASIC) and the Australian Prudential Regulation Authority (APRA); or
the banking and financial services industry.
Bail-in of Retail Bank Deposits
In recent years, the spectre of a ‘bail-in’ of retail bank deposits in the middle of a global financial crisis has been raised, especially given the 2013 bail-in episode involving the Bank of Cyprus and global efforts by the Financial Stability Board (a sub-committee of the G20) to implement a global bail-in framework regime.
As noted in my recent article, Deposit Insurance Is No Protection Against Bail-in, both Labor and Coalition Governments in the post-Global Financial Crisis era have been part of a global effort to implement a bail-in regime within Australia as part of the crisis resolution framework that would enhance the loss absorbing capacity of systemically important financial institutions.
Moreover as I noted, Martin North from Digital Finance Analytics and I (confirmed by the legal analysis of independent solicitor Robert H. Butler) highlighted that the passage of the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 has provided APRA and Australian ADIs with a legal pathway to implement a bail-in of retail bank deposits through the amendment of deposit accounts T&Cs that would then incorporate suitable legal ‘conversion or write-off’ clauses.
Given these findings, recent changes to deposit account T&Cs by multiple Australian ADIs should attract the attention of depositors and be a cause for concern.
HSBC Australia T&C Changes
Within this context, the Australian institution who recently amended their deposit account T&Cs that should be most concerning to depositors is HSBC Bank Australia (HSBC).
The reason being that HSBC has substantially amended clause 10.7 of their retail deposit account T&Cs which now gives the institution effective blanket legal immunity to a number of adverse customer events or outcomes regardless of whether HSBC knew or could anticipate these events or outcomes from occurring. These adverse customer events and outcomes include:
the imposition of capital controls (see events c or i); and
the implementation of a bail-in of depositor funds (see events d or i).
The new HSBC deposit account T&Cs were introduced on Monday, 1 July 2019 and the old and new version of clause 10.7 is outlined in Table 1.
Table 1: Old and New Clause 10.7 – HSBC Bank Australia Deposit Account Terms and Conditions
As illustrated above, HSBC has introduced materially different T&Cs that call out specific events or outcomes in the cases of events c, d or i that are most likely to occur during either a domestic or international financial crisis.
Given the bluntness of HSBC’s new clause 10.7 and given:
the continuing rise in Australian and global debt (including both nominally and relative to GDP) and therefore systemic risk;
the slowing global economy and recent bond yield curve inversions (especially within the US market);
rising geopolitical and geo-economic risk such as the case of the China-USA trade war as well as building tensions with Iran in the Persian Gulf;
recent international banking disruptions with for example Baoshang Bank (China) and Deutsche Bank (Germany); and
public statements by governments and central banks around the world regarding their willingness to employ more extreme iterations of unconventional public and monetary policies
such T&Cs amendments by institutions such as HSBC are potentially informative as to the thinking of both Australian and international ADIs and the real risk profile facing the global financial system as well as individual customers.
Other ADI T&C Changes
Moving more broader than just HSBC, other Australian ADIs have also amended their deposit account T&Cs in recent times that warrant attention from depositors. In many instances these new T&Cs were introduced on 1 July 2019 coinciding with the changes introduced by HSBC.
While the following list is not exhaustive, key T&C clauses for institutions other than HSBC which either provide the ability of institutions to:
impose capital controls;
initiate a bail-in of retail deposit accounts;
amend existing T&Cs with little to no advance notice for customers
are outlined in Table 2 below.
Table 2: Other ADIs - New Retail Deposit Terms and Conditions
Commonwealth Bank (CBA)
National Australia Bank (NAB)
Bank of Queensland (BoQ)
Credit Union Australia (CUA)[9
Butler Legal Opinion regarding HSBC
Responding to the HSBC new deposit account T&Cs, Independent solicitor Robert H. Butler, who provided previous legal opinions regarding the analysis of Martin North and myself has provided a new legal opinion.
Butler’s legal opinion states:
“It would appear that the provisions of the HSBC Terms & Conditions are anticipating that a bail-in regime may well be implemented and it is trying to position itself to be protected as far as it can from any liability for its implementation.
“As advised in my previous opinion, whilst not beyond doubt, it is my opinion that the provisions of the Act do provide for a power of bail-in of bank deposits which did not exist prior to the passing of the Act and that banks, and specifically HSBC, are taking that prospect into account in re-drafting their Terms & Conditions.”
Reason for Changes to ADI T&Cs?
Recent amendments to ADI deposit account T&Cs should not only be a cause for concern for customers, but should beg the question as to why have ADIs implemented these changes now, especially given increased risks to the global financial system and specific banking institutions as mentioned above.
The justification from industry sources, that ADI deposit account T&Cs modernisation stems from the introduction of the new Banking Code of Practice (BCP) on 1 July 2019 by the Australian Banking Association does not seem particularly convincing.
Indeed, nothing that emerges from the Hayne Royal Commission into Banking or from the BCP would justify the new T&C clauses that institutions such as HSBC have introduced.
Rather developments within the global economy and among international banks provide a rational basis for why Australian ADIs would seek to provide themselves with greater legal flexibility as to how to manage potential liquidity and solvency problems in the midst of a domestic or global financial crisis.
With systemic risk growing throughout the global financial system given ongoing concerns about the viability of major banking institutions, Australians need to be attuned to the risks within the Australian and international banking systems.
Amendments to ADI T&Cs of the nature being currently implemented provides sufficient justification to concerns that Australian ADIs are legally positioning to provide themselves with sufficient legal immunity from the imposition of capital controls or the bail-in of retail deposits.
Without further legislative action by the Federal Parliament that would exclude retail deposits from any form of bail-in, risks remain for Australians (whether they be individuals or businesses) who have a bank deposit during a globally or domestically inspired financial crisis.
ADI customers must remain vigilant to ongoing developments within the global and Australian economies and ask themselves whether they are willing to accept the risk of bail-in from occurring and whether current and expected future interest rates are sufficient compensation for accepting this risk.
For those Australian customers who are either:
unwilling to accept such risks; or
dissatisfied with the current and future expected level of compensation to carry such risks
must come to the realisation that the only appropriate course of action is to withdraw their capital from the Australian banking system and seek forms of money and vehicles to hold this money that will ensure capital longevity and the long-term preservation of purchasing power.
John Adams is the Chief Economist for As Good As Gold Australia
 Bail-in is defined in the Australian context as the conversion of ADI liabilities (i.e. capital instruments such as hybrid securities or retail deposits) to ADI equity (i.e. shares in the ADI).
 Capital controls within the context of an ADI refer to government or ADI initiated regulatory or operational measures that limits the flow of capital that can leave the ADI. Examples may include limits on the amount of cash that customers may withdrawal from ATMs which occurred in Greece in 2015.
 As noted in my previous article, Deposit Insurance is No Protection Against Bail-in, Robert H. Butler was responsible for providing a legal opinion confirming that APRA and the Australian ADIs have a legal backdoor pathway to executing a bail-in of retail deposits consistent with my analysis and Martin North.
 The new Butler legal analysis can be found at the following link:
 According to the Australian Banking Association, the new Banking Code of Practice (BCP) introduces several important changes in the wake of the revelations, findings and recommendations of the Hayne Royal Commission into Banking. Importantly this includes chapter 9 of the BCP which requires ADIs to communicate with individual customers in a timely manner and that information communicated will be useful and clear. ADIs under chapter 9 are also required to make product T&Cs distinguishable from associated product marketing material.