Join us for a live Q&A as I discuss the “Deposit Bail-In” issue – in the light of the current Senate legislation. I will be joined by Robbie Barwick from the Citizens Party. How safe is your money in the banks?

We will be joined by Queensland Senator Malcolm Roberts during the show live. He submitted an excellent dissenting report following the Senate Inquiry which calls out the issues at hand.

The Senate will vote on the issue end November, so there is time to make your voice heard! This just might save your bank deposits!

Dissenting report by One Nation Senator Malcolm Roberts

The committee has ignored 190 submissions in favour of the bill and relied on advice from the Treasury and the Australian Prudential Regulation Authority (APRA) in favour of the status quo.

The committee has also relied on advice from the Parliamentary Library submitted to an earlier Inquiry into the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018.

The committee has found that there is no ambiguity in the existing legislation and therefore clarifying the legislation by passing the Banking Amendment (Deposits) Bill 2020 (the bill) is not required. No sensible adverse outcome was identified by the committee. This raises a simple point of logic. If the bill does not have any other adverse outcome and seeks simply to reaffirm the meaning of the legislation currently in place, then there is no reason not to pass the bill.

The conclusion could then be drawn that the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 did indeed provide APRA with the power to order a bail-in. Such power would be cancelled by the bill and the committee’s finding will prevent that occurring. The only new point raised in the committee report is that a ‘basic deposit product’ defined under section 761A of the Corporations Act 2001 must meet certain criteria, including limitations on the circumstances under which a deposit can be bailed-in. However that same clause states: …any other circumstances specified in regulations made for the purposes of this subparagraph. The committee did not consider if this would cover an instruction by APRA to a bank to conduct a bail-in, either in its own right or issued as a legislative instrument by the Treasurer.

I would suggest that a regulated bail-in is allowed by these words, and quite obviously so. The committee is of the belief (1.22) that APRA is required to protect the interests of depositors and of financial stability in Australia, commonly called the 2A provision. This argument flounders on the effect of a bail-in, which is to save the bank and maintain financial stability. This can occur without long term loss to depositors’ funds that were forcibly exchanged for shares in the bank. Those shares will most likely regain their value years later. There is no provision in 2A that places a time frame on ‘protecting depositor funds’.

The wording of 2A does not preclude a bail-in, it precludes an unsuccessful bail-in.

The committee found the Financial Claims Scheme (FSC) protects deposited funds from a bail-in. The $250,000 FCS guarantee triggers once a bank fails. A bail-in is designed to save a bank from failing, meaning the FCS does not prevent a bail-in because the bail-in comes first. It should be further noted that the FCS is not currently active, the decision to activate the scheme is at the discretion of the Treasurer. The committee is relying on a scheme that is not active, may not be active, may be activated after a bail-in and is not funded.

The committee has relied (at 1.29) on the disallowance powers of the Parliament to protect bank deposits from a direction by APRA to bail-in. With the Parliament not sitting for months at a time, plenty of opportunity is afforded for any disallowance to be so delayed as to have no effect in preventing a bail-in. The committee dealt (at 2.7) with the issue of the meaning of the phrase ‘any other instrument’ which is modified by the bill. The committee found that regardless of whether a deposit account is a ‘financial instrument’ or not is irrelevant because Division 1A, Subdivision B of the Banking Act requires that no instrument can be bailed-in without that being in the terms and conditions that form part of the contract between bank and depositor.

Further, APRA would use its powers to overturn such a provision if it was included in that contract. This argument fails because Australian banks have for 18 months now been adding a condition to their terms and conditions that does allow a bail-in. APRA has not acted.

Submission 166, Annexe C from Adams Economics deals with this. The committee accepted APRA’s argument (2.21) that the unfair contract terms of the Australian Securities and Investments Commission Act 2001 would prevent such a clause being added to terms and conditions. This may be true, however under that Act the only arbiter of what is unfair is a Court of Law. This point has not been tested and a ruling on this matter would take years.

The committee accepted (2.27) that the ‘Depositor Preference’ provisions of the Banking Act would protect depositor funds in the event of a bank failure. This is also true but misses the point that a bail-in would occur before a bank failure. ‘Depositor Preference’ provisions would trigger after a bail-in, not serve to prevent it.

The committee found (2.32) that the FCS including the $250,000 guarantee and ‘Depositor Preference’ clauses could be triggered at the same time as an Administrator being appointed to the point. Strictly speaking this is before a bank fails.

This is true, however despite repeated assurances by the Treasury, there is nothing to say that a bail-in cannot be ordered while the bank is still under its own management. This would be before any of the emergency protections are triggered.

A significant finding in the committee report is found at 2.38 ‘Financial Stability Board (FSB)’, an agency associated with the International Monetary Fund (IMF) and G20. The committee reproduces the Treasury’s explanation of the meaning of the FSB agreement Australia signed titled ‘Key attributes of effective resolution regimes for financial institutions’. We agree this document requires depositors’ funds be used to save a bank (a bail-in) rather than taxpayer funds being used (a bail-out). That fact is not in dispute.

Rather than addressing this important issue, APRA pivots back to their assurance that the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 did not, in fact, include those powers.

Other countries including New Zealand have also signed that agreement and then implemented an open and honest bail-in law. Treasury’s obfuscated denial here shows their dilemma. We must honour our international agreements but we must not apparently, be honest about it.

The committee has not dealt with the position of the IMF that the emergency powers in the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 have primacy over the provisions of the Banking Act that APRA relies on for its defence of the existing laws. The Australian government’s 2014 Financial System Inquiry Final Report acknowledged: Inevitably, failures can and will occur, the system will be exposed to crises and, at times, unsecured bank creditors will be exposed to loss.

The Reserve Bank in their current publication, Depositor Protection in Australia, comments on ‘…other unsecured creditors, including depositors’. Bank deposits are, by the Government’s own words, unsecured creditors that will be required to suffer a loss if a bank collapses.

The committee report concludes that ‘it is not clear why the Treasurer would not activate the scheme’. One explanation for refusing to do so is found in a Treasury submission to the 2010 G20 summit, where the Australian Government committed Australia to the Summit Document 13, which included paragraph 30: ‘We reaffirmed our view that no firm should be too big or too complicated to fail and that taxpayers should not bear the costs of resolution.

As the FCS is using taxpayers’ funds to save a bank, this conflict between international obligation and a stated commitment to the FCS should have been further examined. The committee did not deal with the fact that the IMF is on public record as stating the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 does give APRA the power to bail-in a bank.

I would suggest the committee should have taken more note of this difference of opinion and explored the matter further, rather than rubber-stamping the Treasury submission.

The committee has failed to get to the truth of the matter.