Posted 30/03/2015 by Tarek Dale
The Australian Financial Review recently discussed whether the Government will apply a levy on bank deposits to fund the Financial Claims Scheme. This flagpost provides background and key links on the Financial Claims Scheme, and discussion over how it should be funded.
The Financial Claims Scheme (FCS) was initially introduced in 2008 through the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008. It was one of multiple measures taken in response to the global financial crisis.
In its current form, the FCS provides a guarantee by the Commonwealth Government to depositors at locally incorporated authorised deposit-taking institutions (ADIs), up to a limit of $250,000 AUD per account-holder per ADI. This protects depositors ‘from potential loss due to the failure of these institutions’, by ‘providing them with certainty that they will recover their protected deposits quickly in the event that an ADI fails and the Scheme is activated’. The FCS also covers eligible policyholders of general insurance companies.
One of the main policy questions in relation to the FCS is the timing of its funding. Payments are made by the Government under the FCS only where a covered financial institution is unable to meet its obligations to depositors (or particular protected insurance-policy holders). As currently implemented, the Government will make initial payments to depositors under the FCS, but recovers these costs through both the liquidation process, and potentially by ‘imposing a levy on the banking sector’.
Two broad options for funding the FCS are:
- the current model - a tax that is levied on the financial sector after the Government has made payments under the FCS (‘ex post’ funding), or
- a tax levied on financial institutions on an ongoing basis, before any payments need to be made under the FCS (‘ex ante’ funding). Where the funds from the ongoing levy are insufficient, the Government could potentially recover the remaining costs through an additional levy after payments are made.
In 2012, as part of its Financial System Stability Assessment for Australia, the International Monetary Fund recommended that the FCS be changed to ‘ex-ante’ funding. The IMF suggested that the FCS could be funded from:
a credible and adequate reserve fund built up from periodic flat-rate assessments on ADIs’ deposits initially but changing to risk-based assessments over time, and the fund’s investment objective should emphasize liquidity and safety over return.
The Labor Government’s 2013 Economic Statement included a measure for the establishment of a financial stability fund, which would build over time ‘to a target size of 0.5 per cent of total deposits protected by the FCS’, applying from 1 January 2016. In a press conference, the then Treasurer Chris Bowen MP suggested that a ‘financial stability levy’ of 5 basis points, or 0.05 per cent, might apply to deposits covered under the FCS.
The Coalition Government’s 2013-14 MYEFO and 2014-15 Budget Paper 1 noted that the financial stability fund would operate from 2016, ‘subject to the outcomes of the Financial System Inquiry’. However the Financial System Inquiry (FSI), after evaluating the issue, recommended in its final report that the Government should ‘Maintain the ex post funding structure of the Financial Claims Scheme’. In its analysis, the FSI identified a number of advantages for the ex ante (pre-funding) model, including that it was:
- ‘based on a user-pays principle’
- would enable ‘levy funds to be deployed to aid in wider ADI resolution purposes’, and
- offers ‘the potential to build a fiscal buffer’.
However, the FSI noted that ‘an ex ante levy would be an ongoing cost for all ADIs’, and that ‘Australia’s depositor preference arrangements reduce the risk of an ADI’s assets being insufficient to meet insured deposits’ (under the Australian framework, depositors have preference over other unsecured creditors when an ADI is being wound up). It also argued that its other recommendations (including for stronger ADI capital requirements) would reduce the need to draw on any potential financial stability fund.