Silicon Valley Bank, a major lender to the tech sector, collapsed in early 2023 after a run on deposits and a capital crisis. It was the largest U.S. bank failure since the 2008 global financial crisis and the second-biggest in history. The bank had about $209 billion in assets and $175 billion in deposits. California regulators closed the bank and put it under the control of the Federal Deposit Insurance Corporation (FDIC). The collapse had a huge impact on its depositors, who faced uncertainty and anxiety over their money. This article will explore what will happen if similar situations happen in Australia.

Depositor Protection in Australia

Protection for Depositor has been a principle in Australia first enshrined by the Banking Act 1945 (Cth) as a function of the central bank and later the Reserve Bank of Australia (RBA).

In the wake of 2007-2008 Global Financial Crisis, the Australian Government established the Financial Claims Scheme to reassure depositors that their funds are protected in the case of an Authorised Deposit-taking Institution (ADI) collapse. During the height of the financial crisis, the scheme covered up to $1 million of deposits. The cap was lowered to cover up to $250,000 in deposits since February 2012. This cap applies to the total sum of an account holder’s deposits under a single banking license, being $250,000 per account holder per ADI. (Funds in banks are guaranteed by the government up to $250,000 per head per bank.) This means that if you have deposits with more than one ADI, you are entitled to separate protection of up to $250,000 for each ADI.

For example, if you have $200,000 with Bank A and $200,000 with Bank B, both of your deposits are fully protected by the FCS. However, if you have $400,000 with Bank A and $100,000 with Bank B, only $250,000 of your deposit with Bank A is protected by the FCS and the remaining $150,000 is not. The reason for this is that the FCS is designed to protect most depositors who have small to moderate amounts of money in one or more ADIs. It is not designed to protect large depositors who have more than $250,000 in one ADI.

For deposits above the amount of $250,000 the depositors are not guaranteed and would be treated as unsecured creditors in the event of a bank failure. This means that the depositors would have to wait for the liquidation process to be completed and hope to recover some of their money from the bank’s assets. However, this could take a long time and there is no guarantee that they would get their full amount back.

The FCS only applies to Australian incorporated banks and not foreign banks. Depositors of foreign banks in Australia are not protected by the FCS, but they may be protected by the deposit insurance system of their home country. However, this may not be as reliable or timely as the FCS, which pays depositors directly within seven days of a bank failure.

APRA

Currently, the statutory body which governs deposits in ADIs is the Australian Prudential Regulation Authority (APRA). APRA is established by the Australian Prudential Regulation Act 1998 (Cth). APRA is tasked with regulating bodies in Australia that carries out banking business, including the business of taking deposits and accepting loans. APRA is to balance the objectives of financial safety, efficiency, competition and promote financial system stability when undertaking its functions.

APRA has broad-reaching regulatory and oversight powers that allows it to identify behaviours that may lead to financial distress and threatens financial system stability. These powers include but not limited to obtaining information, providing binding directions, appointing statutory managers to assume control of ADIs and to prevent the Australian branch of a foreign-owned ADI from moving assets and liabilities in and out of Australia.

In addition to APRA, Australian Securities provides indirect supervision role by setting standards around the sale and distribution of deposits and other financial products and services provided by ADIs and by enforcing the standards under the Corporations Act 2001 (Cth) on the duty of care, and conduct of executives and directors in financial situations.

Key Takeaways

In a hypothetical collapse, depositors in Australia are protected by the Government’s Financial Claims Scheme, which guarantees payouts for deposits up to $250,000 for account holders at each Australian ADIs in the case of a collapse of a qualifying bank. However, deposits above $250,000 or deposits with foreign banks are not covered. Depositors ought to check whether their deposits are protected by the FCS on the APRA website.

*Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to changes over time. You should always seek professional advice before taking any course of action.*