Financial Claims Scheme
Maintain the ex post funding structure of the Financial Claims Scheme for authorised deposit-taking institutions.
Government should retain the current FCS funding model for ADIs, under which payouts are recovered from liquidating the failed ADI and, where this is insufficient, an ad hoc levy can be placed on the banking industry.
- Ensure the FCS has an appropriate and efficient funding structure.
- Minimise the ongoing regulatory costs of the FCS.
Problem the recommendation seeks to address
The FCS is a fundamental component in protecting depositors in Australia, providing a guarantee on deposits of up to $250,000 per account holder per ADI. The FCS allows depositors to access protected deposits quickly, without having to wait for a liquidation process to be completed.
Currently the FCS is funded ex post. If an ADI fails and the FCS is activated, Government provides the necessary funds and then reclaims them from the proceeds of liquidating the institution. Where the liquidation proceeds are insufficient, Government can place a levy on industry to make further recoveries.
A number of bodies, including the IMF and the CFR, proposed an alternative ex ante funding model, which is also being consulted on by the International Association of Deposit Insurers.69 The former Government also announced it would adopt ex ante funding.70 Under this model, ADIs with FCS-protected funds would be charged an ongoing levy to compensate for the guarantee the FCS provides.
The proposed ex ante funding model has a number of appealing features, including:
- Being based on a user-pays principle.
- Enabling levy funds to be deployed to aid in wider ADI resolution purposes.
- Offering the potential to build a fiscal buffer.
However, an ex ante levy would be an ongoing cost for all ADIs. In contrast, the current ex post model only imposes a levy if the FCS is triggered and insufficient funds are recovered through liquidation to recoup the costs. Because Australia’s depositor preference arrangements reduce the risk of an ADI’s assets being insufficient to meet insured deposits, the case for an ongoing levy is less justified.
The Inquiry notes that the recommendations in this chapter would further strengthen the resilience of the Australian banking sector by reducing the risk of failure and mitigating the costs of failures that do occur. If adopted, these recommendations weaken the case to charge an ex ante levy for the FCS.
The Inquiry notes that the consultation package outlined in Recommendation 5: Crisis management toolkit, includes a number of measures designed to strengthen the FCS and Government’s ability to recoup costs. These include an additional payment option that allows APRA to transfer deposits to a new institution using the funding available under the FCS.
On this basis, in the Inquiry’s view, it is preferable to retain an ex post funding model that avoids placing an ongoing financial burden on the industry.
69 International Monetary Fund (IMF) 2012, Australia: Financial System Stability Assessment, IMF, Washington DC; Basel Committee on Banking Supervision and International Association of Deposit Insurers 2014, Core Principles for Effective Deposit Insurance Systems, Bank for International Settlements, Basel.
70 ommonwealth of Australia 2013, Economic Statement, August 2013, statement by the Hon. Chris Bowen MP and Senator the Hon. Penny Wong, Canberra.