I am actually really interested to know this. In Aus there is a theoretical 250k federal insurance on deposits. That I think has been somehow watered down by the government to be capped at a certain amount and in reality it means that not all deposits will be insured up to the 250k amount... I couldn't find this in a search but it was posted here years ago. But on to a bank failure. So assuming all deposits are insured up to 250k inside a bank that fails. They also have multiples in "value" in collateral in the form of mortgages. Obviously the event that causes the bank to fail is also going to see the value of that collateral plummet, but the very essence of fractional reserve banking means that bank will own far more in mortgages than they do in deposits and other liabilities. I am interested to hear how the liquidation of the bank would play out for the average punter. Let's say an individual had more in deposits at a bank than their mortgage. Say 500k in savings deposits and 250k in a house loan. Assuming that only 250k of that deposit is insured, their deposit would reduced to 250k. What then happens to their debt to the bank? Please don't tell me another bank will buy that mortgage and the punter would still owe 250k to a new bank and be out of pocket 250k in savings? This stuff is hard to get my head around.
You might have to wait till shiney wakes up in the morning to give you a rational explanation as to why any sane person would have 250k or more in a bank account and then worry about what would happen to that money if the bank went under.
Well I can see why someone would have a substantial amount, up to at least their mortgage debt in a 100% offset account. It means they have that cash available at a moment's notice and what ever they spend it on, they're essentially paying mortgage interest rates. I've been saving for a number of years to buy a business. All of that cash is sitting in my offset account.
I presume in a bank collapse the offset funds would immediately be offset against the mortgage. Check your contract, ask the bank.
If you had a shed load of cash on hand, would now be the right time to be opening bank accounts with multiple institutions and spreading 250k around as many as it took to cover your total cash?
This should answer your question/s.... https://www.silverstackers.com/forums/index.php?threads/savings-guarantees.101440/#post-1212928
thanks so much. Don’t know why I couldn’t find this earlier. If what odd job is saying is correct, then there basically is no guarantee in Australia.
And then there’s the bail-in legislation. https://www.aph.gov.au/DocumentStore.ashx?id=39adc416-0a7a-4629-99df-127f68f36216&subId=686227
Well that’s correct in theory but each ADI has a cap of $20bn AUD. https://www.aph.gov.au/DocumentStore.ashx?id=39adc416-0a7a-4629-99df-127f68f36216&subId=686227 According to Canstar, as of February 2022 the big 4 had the following in deposits in their institutions. CBA: $342.99bn WBC: $255.76bn NAB: $165.38bn ANZ: $154.76bn https://www.canstar.com.au/home-loans/compare-the-big-four-banks-in-australia/ @ $20bn cap on each, essentially only 5.83% of CBA customer deposits are insured, with up to $12.9% for ANZ. Now if it is the case that say 6% of CBA’s depositors are made up of thousands of tiny every day transaction accounts and people with small term deposits, and roughly 94% of their deposits come from a tiny portion of whales, then the $250k deposit insurance will cover a huge chunk of their individual depositors, leaving only a few whales at risk. I find that scenario so highly unlikely because it would only take a few of their whales to change banks and it would be the equivalent of a bank run. That suggests to me that a shit-load of all Australian depositors are exposed badly to a bank failure. On the flip side to that is that all of the big 4 are far too big to fail. One going down would see the whole baking sector collapse. So we can be pretty sure the RBA will start/speed up the printing presses to ensure that doesn’t happen. I’d say that would be the case for all of the next tier of banks that aren’t owned by the big 4 also.
On a related note. CBA had around $510.73bn in home loans (including investors) according to that Canstar report. That was against $342.99bn in deposits as of Feb 2022 Where can we find what the value of that collateral against those loans is? What would a 20-30% or even a 30-40% decline in home values do to that book? Could we see a scenario where a major bank has more on loan than the houses are worth.
The other consideration is time. As was mentioned earlier, final payouts after Pyramid Building Society went bust took 16 years. Even if the 250lk make good payments take a couple of weeks to process the damage to confidence could be terminal.
i am not sure what you mean by that? Why would caps be meaningless? If there was a true 250k insurance for everyone in a bank then a shed load of people would be insured. As it stands essentially no one is insured between (5-12% of total deposits depending on which bank) how would the banks have their arses covered?
Open Market Operations 2021 - Federal Reserve of New York https://www.newyorkfed.org/medialibrary/media/markets/omo/omo2021-pdf.pdf See p14, p63 - "Central Bank Liquidity Swaps'" U.S Dollar funding: an international perspective - Bank of International Settlements https://www.bis.org/publ/cgfs65.pdfp See p77 - "Appendix F - Individual country experiences: Australia"
My previous statements have been debunked, so I'm removing most of the post and leaving just the sources.
What I do know about bank failures from relatives back in Cyprus is that many lost half their savings and superannuation.
