No banking safety net

HOW safe is your money if your banking institution goes the way of British bank Northern Rock and looks like failing?

No banking safety net

HOW safe is your money? If it's in a bank or a building society or a credit union, then it's safe from thieves breaking in and stealing it but what if your institution goes the way of British bank Northern Rock and looks like failing?

And what about your superannuation? Your insurance? Your managed investment fund? What about Nana and Pop's pension account?

Will you be lining up along the footpath to get your money out? Will the government step in and bail you out? Or will you lose everything if your financial institution fails?

The reality is that thanks to inaction by the federal government, the answers to all these questions are unclear. Federal treasurer Peter Costello has had recommendations from Australia's financial regulators to set up a deposit insurance scheme sitting in his in-tray since last year.

As it stands now, depositors have preference over other creditors when an authorised deposit-taking institution - such as a bank, credit union or building society - is liquidated. Insurance policyholders have preference for some insurance products.

But that may or may not cover the money you had in your account and is a very limited safety net.

Generally the public assume "authorised deposit-taking institutions" are somewhat covered by an implicit government guarantee because they are supervised by the government. But that guarantee is not contained in any law or regulation.

"When failures occur, there is generally strong pressure on governments to underwrite at least some of the financial promises made by some types of failed institutions, regardless of whether there was any prior commitment to do so," academic Kevin Davis wrote in his study of financial system guarantees.

The Council of Financial Regulators - the ACCC, APRA, ASIC and the RBA - proposed a scheme that would apply to all deposit-taking institutions (banks, building societies and credit unions) and also to life insurers, friendly societies, and general insurers.

The scheme would cover only "capital certain" promises, such as deposits, claims on insurance policies, guaranteed life insurance savings and annuity (pension) products.

The proposed scheme would not cover managed investment schemes and market-linked products, including ordinary superannuation products and pensions.

The limit for the scheme would be capped at about $20,000, with "tightly defined discretion" for a scheme administrator to pay higher amounts in certain circumstances.

The regulators proposed that initial payouts to depositors would be only 90 per cent of any claim (up to the cap) with the balance paid only when the liquidator had the assets available to pay the balance.

The scheme would be restricted to liabilities in Australia, with initial funding through federal budget appropriation and loans from the Reserve Bank.

Payouts and scheme costs would be recovered from the sale of assets of the failed entity. Industry levies would also apply to make up any shortfall.

The banks and their association, the Australian Bankers Association, are known to oppose those recommendations and really prefer the status quo.

This would mean ongoing uncertainty about what kind of support would be available in the event of a banking crisis.