There Is No Real Assurance That Money In The Bank Is Safe

The Sunday Age

Sunday October 12, 2008

James Kirby

A HAND gripped my arm. An Irishwoman "of some means" looked me in the eye and said: "I've all my money in cash in Dublin. They're in recession over there, should I bring it to Australia?" What could I say? I told her: Irish banks are guaranteed, Australian banks are not.

I didn't get to tell her Australian banks were rated the world's fourth best by the World Economic Forum. I hadn't time to say that while English banks can hardly get enough money to keep trading, Australia's Commonwealth Bank this week effortlessly raised $2 billion to finance the takeover of BankWest.

Neither was it fair to mention that deposit rates here are among the world's highest. All that hardly mattered because all she wanted to know was which banks are safer. And I don't blame her.

At the end of the worst week since 1987 when the global stock markets have surprised almost everyone with the latest leg in a year-long downturn, people want to know their money in the bank is rock-solid safe.

What we have is a half-baked protection system. Day after day as the credit crisis deepens, Prime Minister Kevin Rudd dodges the question on bank deposits. Just so you know, there is no explicit guarantee of depositors' funds in Australian banks. Legislation going through Parliament will change things a little. Government policy is that depositors come first. Under the coming claims scheme, your first $20,000 will be guaranteed.

Obviously, if you have $60,000 in cash, you could put $20,000 in three banks, where you would also have to pay three sets of bank fees.

But this is not a time for half measures. Let's get a bank guarantee - not because we have bad banks but because we want to galvanise the strength of one of the world's best banking systems. What's more, unlike Ireland, Germany or Britain, where bank guarantees are operating, many customers are also shareholders.

There will be free marketers who say protecting the banks is wrong. They say it creates a "moral hazard", where banks become inefficient because they know they will always be bailed out. I don't think this is a sufficient concern - the hazard most people worry about is that banks are operating without a safety net.

Bank re-regulation is under way worldwide. It won't be avoided here. As investors are refused proper protection, the biggest bank, CBA, is allowed to buy yet another regional bank in a particularly prosperous state already ridden with monopolies. Regulators waved through the takeover in the interests of strengthening the system.

Has everyone forgotten about competition?

The last time I heard regulators use this argument was when CBA took over the State Bank of Victoria in the early 1990s. We've been here before, folks, and the regulators don't seem to have learnt much.

kirbyjourno@hotmail.com