Is it still safe to keep my money in a bank?

Whether you’ve heard about another dip in the market, the threat of recession or any other worst-case scenario, you may be curious as to whether your money is actually safe in a bank - or better kept hiding under your mattress.

While there are obvious benefits of keeping your funds in a bank, such as safety and accessibility, it’s also generally much easier to reach your savings goals with a bank. Keeping your money in a high interest savings account (ensuring you meet any conditions) will always help you to reach your savings goals faster than hiding your money under your mattress. 

However, while there are laws in place designed to protect deposit-holders, murky legislation passed in 2018 may mean that your deposits are vulnerable. 

Let’s explore how the money you deposit into a bank is kept safe, and whether it is at risk of being compromised.

How your funds are kept safe by banks

Firstly, Australia is known for its political and economic stability. This is partly due to the work of the Reserve Bank of Australia, Australian Prudential Regulation Authority (APRA) and Australian Securities and Investments Commission (ASIC). These bodies aim to keep the economy, the banking system and the financial services system strong and secure.

That means the money you deposit in a bank is highly unlikely to be stolen by the government or eaten up by hyperinflation, as happens in some countries.

Secondly, your money is typically safer in a bank than in your own home. If your home were to be robbed, unless you had fantastic insurance, those funds are potentially lost forever. In the unlikely event your bank was robbed, there are insurances and protections in place to preserve your account balance.

Finally, and most importantly, deposit-taking institutions in Australia are covered by the Financial Claims Scheme (FCS). Under this program, the government has guaranteed to protect up to $250,000 for each account holder at each licenced bank, building society or credit union incorporated in Australia. 

There are approximately 150 lenders covered by the Financial Claims Scheme – click here to see the full list.

The risks of the Financial Claims Scheme

Even though depositing your money with an Australian lender is extremely safe, no financial investment can ever offer total certainty. For starters, the Financial Claims Scheme only covers up to $250,000. So, if you had $400,000 deposited with a lender, and that lender collapsed, you could lose $150,000. 

There is an obvious way around this risk – deposit, say, $200,000 with one lender and $200,000 with another. That way, both deposits are covered by the government guarantee.

But there is another risk: the government could abolish the Financial Claims Scheme whenever it likes. There is nothing to stop the government abolishing the guarantee tomorrow or in the next Budget or even during a future crisis.

The deposit guarantee was established in 2008 during the Global Financial Crisis, when overseas bank collapses made people fear for the security of Australian lenders. This guarantee is most relevant during a time of crisis – but it is also at such moments that governments are at their weakest economically. So although it is extremely unlikely, it is possible the government might abolish the guarantee if it was ever placed under severe economic pressure. 

However, there is a little-known scenario that may make this situation more precarious – the bank ‘bail-in’ – and this has amplified a lot of fears around keeping money in banks. 

The bank bail-in explained

As opposed to a bail out, in which a government provides financial instructions with funds to ‘bail them out’ from going under, such as what happened during the Global Financial Crisis (GFC) in America, a bail-in protects financial institutions in a different way.

In a bail-in, a bank is able to essentially take money from your deposits to bolster its own finances in an emergency situation. 

This action did occur in Cyprus during the 2012 – 2013 Cypriot financial crisis, through a one-time bank deposit levy to raise $7.5 billion in needed funds. Deposits with balances below €100,000 were to have 6.75% withdrawn, and 9.9% was to be withdrawn from uninsured amounts above €100,000. Depositors were to be compensated with the equivalent amount in shares with their banks.

But could a bank bailin happen in Australia? An ABC article showed that there is legislation (passed in 2018) that allows the Australian Prudential Regulation Authority (APRA) the power to “allow a bail-in financial instrument, known as ‘hybrid securities’”. This legislation is, understandably, causing some concern and being heavily scrutinised. 

Two hundred submissions have been submitted since 2018 to remove any legislative “uncertainties” around whether APRA and banks can bail-in Aussie deposits - and politicians are fighting to change this too. The main concern appears to be that the laws are “vague” in their description of what deposit-taking institutions may be able to do with deposit-holder funds. 

However, the Treasury and the Australian Bankers Association have denied this argument, making reference to the FCS as part of the protections that are in place to prevent something like this from ever happening. 

Thankfully, Australia is in a completely different financial position than Cyprus. A bail-in is such a controversial move that it is unlikely that APRA would allow it to occur.

What has APRA said about a bank bail-in?

APRA Chair, Wayne Byres, spoke on the issue of bank bail-in’s to the House of Representatives Standing Committee on Economics in March 2018. 

“Another critical component of a resilient financial system is ensuring we have a strong regulatory framework, particularly in times of crisis. This framework has been strengthened with the recent passage of the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017.

"The Bill provides a welcome and substantial improvement to APRA’s crisis management powers, better equipping us to deal with the actual or imminent failure of a financial institution. It is an underappreciated but essential piece of infrastructure that maximises the public sector’s ability to preserve an orderly financial system in times of stress," said Mr Byres.

Addressing fears around a 'bail-in' directly, Mr Byres said: "Concerns have been expressed in some quarters that the Bill might allow APRA to confiscate or otherwise use depositors’ money to save a failing bank.

"I would therefore like to use this opportunity to state clearly that that is most definitely not the case. There is no such power in the Bill. Indeed, APRA’s purpose under the Banking Act is to protect depositors, and the idea of ‘bailing in’ deposits would be anathema to that core purpose.”

Another safety net also exists to protect Australian deposits – the Reserve Bank of Australia’s Committed Liquidity Facility (CLF). This helps to ensure banks are in a solid financial position and can manage any liquidity risk. It was introduced to protect Australians from economic situations like in America or Cyprus following the GFC. 

At this point, it still appears that keeping your money in a financial institution is still the safest place for it.

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