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Deposit Insurance Is No Protection Against Bail-In

Australians must come to the realisation that the Federal Government’s Financial Claims Scheme (FCS) (i.e. deposit insurance) is no protection against a potential bank bail-in of retail deposits.

Across Australia, many Australians with money in an Australian Authorised Deposit-taking Institution (ADI) are unaware of the proper relationship between:

  • the insurance of retail deposits by the Federal Government (officially called the FCS); and

  • the risk of a bail-in of retail bank deposits (e.g. Bank of Cyprus 2013).

With an increasingly fragile global financial system and recent banking eruptions with for example, Baoshang Bank (China) and Deutsche Bank (Germany), the belief that the FCS may insulate individual Australians from the risk of a bail-in of retail bank deposits may prove costly for many Australians.

For many months now, analysts such as Martin North from Digital Finance Analytics and

myself through our YouTube program, In the Interests of the People, (and our 2018 series of bail-in episodes on the ‘Walk the World’ YouTube Channel) have been attempting to warn individual Australians with bank deposits that their money may be at risk during a financial crisis where an individual Authorised Deposit-taking Institution (ADI) becomes financially distressed.

Financial Claims Scheme

As I noted in an October 2018 article, Deposit Insurance Where the Insurer Has No Money to Pay[1], the Australian Federal Government introduced the FCS in October 2008 to restore confidence in the banking system in the wake of the Global Financial Crisis (GFC) to prevent a full‑scale bank run.

After revisions to the FCS in 2011 by the then Federal Treasurer Wayne Swan, deposit insurance in Australia is now available for individual Australians to the amount of

$AUD 250,000 per customer, per institution on the basis that the Federal Government will provide a maximum of $AUD 20 billion of deposit insurance per ADI with an additional $AUD 100 million to cover administration costs.

Although, limitations to the FCS still remain including:

  • the insurance payable is not automatic and from a legal stand point the FCS is required to be ‘activated’ by the Federal Government (via a discrete legal instrument);

  • the Federal Government has not set aside any capital to pay depositors in the event that the FCS is activated[2];

  • the Federal Government has not increased the payable deposit insurance per ADI since the introduction of the FCS even though the total amount of deposits that are insurable under the FCS has increased from $AUD 650 billion in October 2008 to $AUD 920 billion as of 31 December 2018[3], meaning that the quantum of insurance per institution may be inadequate to cover all deposits under $AUD 250,000[4].

Bail-in of Retail Bank Deposits

Alternatively, as I noted in an September 2018 article, Will the Prime Minister order a ‘Smash and Grab’ of bank deposits[5], Australia has signed onto global efforts via the G20 in the post-GFC era (2010 and 2014) that would develop greater loss absorbing capacity among systemically important financial institutions which would ostensibly address the too-big-to-fail problem and hence protect taxpayers from future costly bail-outs.

The Financial Stability Board (FSB) as part of the G20 has been at the forefront of these efforts including through the development and implementation of a global ‘bail-in’ regime which includes the bail-in of an array of capital instruments such as ‘hybrid securities’ (i.e. convertible bonds and notes) as well as retail bank deposits that allows financial institutions to recapitalise using creditor capital.

In February 2018, the Turnbull Government via Parliament enacted the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018

(Crisis Resolution Act) which amended the Banking Act 1959 and provided the Australian Prudential Regulation Authority (APRA) with new regulatory tools to deal with a new financial crisis including bail-in powers, otherwise known as ‘conversion and write-off provisions’.

As noted in a series of videos between Martin North and myself in 2018, via the ‘Walk the World’ YouTube Channel, Schedule 1, Part 1, Section 31 of the Crisis Resolution Act[6] details subsection 11CAB that has now been encompassed into the Banking Act 1959 which states instruments that are applicable for conversion or write-off are instruments ‘that contains terms that are for the purposes of the conversion and write-off provision’.

As detailed by North and myself, this clause provides APRA and Australian ADIs with a legal pathway to enact a bail-in of retail deposit accounts via the banks amending the terms and conditions (T&Cs) of their deposit accounts that would then incorporate suitable legal conversion or write-off clauses.

As documented last year, the T&Cs of most Australian ADIs allow financial institutions to amend their T&Cs with little to no advance notice and in some cases no direct communication with customers.

Hence, in the midst of a financial crisis, APRA and Australian ADIs have sufficient legal flexibility to conduct a bail-in of retail bank deposits by stealth via:

  • Step 1 – amending ADI T&Cs for retail deposit accounts that would encompass requisite clauses for a bail-in to occur; and

  • Step 2 – APRA issuing a ‘recapitalisation direction’ consistent with Division 2, section 13E of the Banking Act 1959 ordering for the bail-in to occur.

The existence of this legal loop-hole within the Crisis Resolution Act and the ability of Australian ADIs to conduct bail-in was confirmed via an independent legal assessment by solicitor Robert H. Butler[7] which was detailed on 6 April 2019 via the episode entitled: “solicitor confirms that bail-in of deposits is legal”[8] on the ‘In the Interests of the People’ YouTube Channel[9].

Direct consultation with relevant policy advisors within Federal Parliament conducted by myself revealed that ADIs unilaterally amending T&Cs in the context of a retail bank deposit bail-in was not considered prior to the passage of the Crisis Resolution Act.

Confusion between FCS and Bail-ins

To many Australians who are aware of the existence of the FCS and the possibility of bail-in, an ensuing belief exists that deposits spread across multiple Australian ADIs below the $AUD 250,000 FCS threshold is requisite protection against possible deposit confiscation.

However, this belief confuses the role of the FCS in the step-chain process of when an ADI experiences financial difficulty.

As outlined in Diagram 1, the FCS is only legally ‘activated’ by the Federal Government in the event of the ADI declaring insolvency or bankruptcy. That is, (as outlined in Scenario 2), an ADI is unsuccessful in securing requisite capital that would allow it to become an on-going concern and continue with normal operational banking activities.

As noted in the Adams and North series, Australian ADIs have existing layers of capital protection including:

  • bank capital reserves;

  • hybrid securities (which already encompass explicit bail-in clauses as part of their prospectus documentation); and

  • the Committed Liquidity Facility (which is operated by the Reserve Bank of Australia).

Scenario 2 would in effect require that ADIs extinguish these existing established layers of capital.

Alternatively, an ADI that is successful in recapitalising through obtaining new funds either through:

  • a bail-out (an external injection of capital) (i.e. Scenario 1); or

  • a bail-in (a legal confiscation of creditor’s money (beyond hybrid securities) in exchange for bank equity[10]) (i.e. Scenario 3)

and does not fail (i.e. does not declare insolvency) will not trigger an event that results in the activation of the FCS by the Federal Government[11].

Given that a bail-out typically requires an injection of capital from the jurisdictional government in which an ADI operates, the initiation of a bail-in of retail bank deposits in the Australian context allows the Federal Government to save tax-payer money by:

  • not bailing out a financially distressed ADI; and

  • not being required to refund insured deposits under the FCS.

Therefore, Australians should consider the bail-in of retail deposits as a mechanism that allows the Federal Government to avoid being directly financially liable under the FCS.

Diagram 1: The step process difference between bail-in and the FCS


Having Australian dollars deposited in an Australian ADI under $AUD 250,000 is no guarantee that the deposited cash will be safe in the event of a global or domestic credit liquidity crisis.

Rather, the FCS may only be activated if an ADI commercially fails and that bail-in is a mechanism to ensure that an ADI does not fail.

Hence, Australians must come to the realisation that the ultimate form of protection against the failure of an ADI or a bail-in of depositor funds is to withdraw those funds from the banking system and to hold this wealth in a physical or digital form which is able to maintain its purchasing power longevity.

Given the over 1,000 year history of fiat currencies and their continual failure to survive as an acceptable form of money due to excessive money printing and runaway inflation, Australians must question the utility of holding large reserves of Australian dollars especially given the current and stated intended direction of Australian monetary policy which includes unconventional initiatives such as zero or negative interest rates, quantitative easing and potentially helicopter money.

Rather, Australians who have an interest in maintaining the purchasing power of their money should consider a range of alternative forms of money and currencies that will serve this purpose. This includes physical gold and silver bullion which has been successful in maintaining its purchasing power for over 5,000 years and therefore has stood the test of time.

John Adams is a Chief Economist of As Good As Gold Australia


[2] This is because the Federal Government has maintained an ‘ex-post’ funding model for the FCS meaning that if the FCS were ‘activated’, the Federal Government would need to pay the deposit insurance payable up front and then subsequently seek to recoup the funds through an imposed bank levy.

[4] This is likely to be true for large ADIs – especially the big four banks

[9] In its February 2019 report (IMF Country Report No. 19/54), the International Monetary Fund called on Australia to implement ‘a full statutory bail-in regime, based on best international practice”. Despite this call, the analysis by North, Butler and myself demonstrate that bail-in of retail deposits in Australia is technically and legally possible.

[10] Creditor’s money for an ADI could include capital instruments for example ‘hybrid securities’ or retail deposit funds

[11] Note that it is theoretically and legally possible that APRA could initial a bail-in of retail deposits for a particular ADI and that this bail-in is insufficient to save the ADI, hence requiring the activation of the FCS.

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