stability of banks in australia...

[Toolin Around]

Being a bit of a noob to this country I've no idea the investment practices of the banks here...

There's a number of banks especially in th US that are having a wobble with the credit crisis and it appears that there maybe a lot more to come as European investment banks are showing signs of the wobbles. Has that ever happened in Australia, a bank going broke...

Are peoples deposits insured and or protected in some way in this country. Judging from what I've seen to date (which is very limited) banks here are not to be trusted.

What are some of the things people here put there money into when there appears to be 'storm clouds' on the horizon.

[ian]

Tool'n

there's banks and then there's banks

the distinction is whether they are deposit taking retail banks or merchant banks or other sorts of banks

to my memory, the last time a deposit taking retail bank went belly up was the State Bank of NSW in the 1930s (and that story is really really murky — one version has it that the bank only went belly up because the then Federal Government wanted the NSW Government to fall)
In more recent years, say since the 1950s, if a retail bank gets the wobbles the Reserve Bank arranges a "shotgun marriage" with one of the (what are now) 4 majors or one of the 2nd tier retail banks


However, non retail banks have been let fail
The most recent that comes to mind is Rothwells in about 1989


ian

[echnidna]

and building socities don't get bailed out.

[Sturdee]

Are peoples deposits insured and or protected in some way in this country. Judging from what I've seen to date (which is very limited) banks here are not to be trusted.

Trading banks that operate under a federal governments banking licence (not banks that operate under a state licence -State Savings Banks- or merchant banks or building societies) eg the major banks are subject to the Reserve Bank's overall control and have the Reserve Bank as lender of last resort.

This means that the government, through the Reserve Bank, will ensure that those banks will not fail, and if necessary will take over control of such bank and force a merger with another.

The last case was the Bank of Adelaide that got into trouble trough its finance subsidiary (Finance Corporation of Australia) and was merged with a major bank on the Reserve Bank's instructions.

But if you put your money into a building society or a local small state bank you are not so covered.

Peter.

[Koala-Man]

The RBA's Financial Stability Review comes out on Thursday. There'll be a link to it under the "latest news" here from 11:30 am AEDT:

http://www.rba.gov.au/

Now I want you all to read it - now stop grumbling children, it will be no more than 70 pages - and I want a written summary and analysis first thing Monday morning!

In the meantime, you could browse through the FSR that came out in Septmber:

http://www.rba.gov.au/PublicationsAn...eview_0907.pdf

There will be some interesting background information here:

http://www.rba.gov.au/PublicationsAn...007/index.html

I look forward to seeing your work.

Extra points will be awarded for neatness.

Gaz.

[Koala-Man]

..the government, through the Reserve Bank, will ensure that those banks will not fail, and if necessary will take over control of such bank and force a merger with another.
Peter.

For practical puposes, that is very, very probably true - eg State Bank of Victoria's shotgun marriage to CBA in the early 1990s - but it's at the RBA's discretion whether or not they bail anyone out. See this from their web site ("The Bank" refers to the RBA):

"The Bank would lend directly to an illiquid deposit-taking institution authorised by APRA only if it was of the view that the failure of the institution to make its payments could have serious implications for the rest of the financial system. In principle, the Reserve Bank may also be willing to consider applications for emergency liquidity support from non-APRA supervised institutions that have been provided with an exchange settlement account by the Reserve Bank. The Reserve Bank does not see its balance sheet as being available to support insolvent institutions."

But don't worry, I'm sure everything will be all right!

Gaz.

[Tankstand]

In SA we had the "State Bank" fiasco, thanks John Bannon!

Were still paying that one off.

[ian]

For practical puposes, that is very, very probably true - eg State Bank of Victoria's shotgun marriage to CBA in the early 1990s - but it's at the RBA's discretion whether or not they bail anyone out. See this from their web site ("The Bank" refers to the RBA):

"The Bank would lend directly to an illiquid deposit-taking institution authorised by APRA only if it was of the view that the failure of the institution to make its payments could have serious implications for the rest of the financial system. In principle, the Reserve Bank may also be willing to consider applications for emergency liquidity support from non-APRA supervised institutions that have been provided with an exchange settlement account by the Reserve Bank. The Reserve Bank does not see its balance sheet as being available to support insolvent institutions."

again talking of the practicalities ...

there are 4 major retail banks which between them hold 80+% of the retail deposit taking market (someone else can look up the actual figures)
then there are the 2nd tier banks (apart from St George I can't think who else falls in this category – maybe SunCorp Metway)
and then there are the "regionals" (which is basicaly everyone else)

you would expect that the failure of one of the majors would lead the RBA to form the view that the failure of the institution to make its payments could have serious implications for the rest of the financial system — i.e. perform a bailout — and the same might be true for the 2nd tier banks (on the grounds that a shot gun marriage with one of the 4 majors would make the acquirer too big)
as to the regionals — your guess is probably 50% better than mine

at the end of the day, the RBA's ability to bail out a bank is ultimately backed by the Federal government's power to raise the taxes needed to pay off the borrowings the RBA would need to make. So if a critical mass of voters look like being cheezed off enough to turf the government out, the RBA would be "requested" to act.



ian

[Sturdee]

This means that the government, through the Reserve Bank, will ensure that those banks will not fail, and if necessary will take over control of such bank and force a merger with another.

The critical point is that the government will ensure etc.

There is a lot said about the so-called independant nature of the Reserve Bank, especially by politicians who don't want to accept responsibility for the nasty and incorrect decisions to raise interest rates by the RBA in order to slow down the economy which is stimulated through the governments own policies.

This so-called independance is rubbish as it is the government bank, board members are appointed (and can be removed) by the government and they are required to follow the Treasurer's instructions.

So the Reserve Bank will ensure that the major trading banks operating under the commonwealth banking licences will not fail or they will take control to ensure the depositors moneys are safeguarded. If necessary under the Treasurer's instructions.

Peter.

[artme]

Remember John Cain and the Stae Savings Bank of Victoria? He and Bannon managed to turn SA and Vic into a rust belt.
The reasons for the bank in NSW going broke can be traced to that fool of a Jack Lang who was refusinge to pay bills and actually went to the bank when premier of the state and withdrew massive sums of money himself.
Jack's son was accused of bankrupting a "Star Boquet" building society also.

[Toolin Around]

Funny thing about interest rates. There's a lot of complaining about them. I just did a search of historical cash rates and at present I'd say they look to be on the low side when compared with the last 30 years of rates

[Koala-Man]

This so-called independance is rubbish as it is the government bank, board members are appointed (and can be removed) by the government and they are required to follow the Treasurer's instructions.
Peter.

Interestingly, the rules on this have just changed.

See http://www.treasurer.gov.au/DisplayD...03.htm&min=wms

My opinion is that the RBA is effectively independent. Yes, the government can overrule the RBA's decisions on monetary policy but it would be so embarrassing that no government would actually try it unless the RBA was trying to do something truly outrageous.

Threat of dismissal of the governor (by the parliament now) is no threat at all - he'd just step into a private sector job paying hundreds of thousands a year more.

Former RBA goveror Ian Macfarlane gives the insiders view in this transcript:

http://www.abc.net.au/rn/boyerlectur...06/1769928.htm

Most financial market economists will remeber his "blame Martin Place" comments (made after a speech in 1992 when Macfarlane was deputy governor) as being something of a watershed in the RBA's quest for independence.

On bank failure:

I think the RBA would be highly unlikely to allow a bank to fail to pay out its depositors, at least its small ones, and not for reasons of political expediency, but because the economy needs a functioning banking system and the banking system needs depositors to be confident that they'll be able to get their money out. (The confidence argument is the strongest reason for the government to support appointment of a well-qualified person to the governorship rather than some know-nothing politcal hack - they would get found out and pilloried without mercy in quick time.)

On the other hand, they'd have no qualms about allowing a bank's shareholders to lose their shirts (eg what the US Federal Reserve just did with Bear Stearns).

Cheers,

Gaz.

[Gingermick]

On the other hand, they'd have no qualms about allowing a bank's shareholders to lose their shirts (eg what the US Federal Reserve just did with Bear Stearns)..

That would be free market socialism wouldn't it?

[Gra]

The banks going wobbly in the states are not the type of institutions we call banks here. they are mainly merchant banks with a small deposit taking section (small being proportional here)

What is biting these organisations has been a headlong dive into NEW derivative products without proper understanding of the underlying risks. The banks in Australia have a much more conservative approach to their investing and product creation practices. (read to chicken#$%t to get in early) As a consequence you will find some banks here will take a hit but it will be absorbed into their books, we have already had some announcements from a couple of the majors, that they were hit (not sure which ones), so I suggest there will be no major fallout, though as a side consequence the non bank lenders are hurting from the dificulty in raising cash (because nobody will buy their securities for any rate ).

Disclaimer: I have no qualifications to give advise on this subject, and I have no real idea what I am talking about, so any investments placed because of my comments is stupid...