Is your money safe in the bank?

Is your money safe in the bank?

This may come as a surprise to most Australians.

Australia remains one of only two OECD countries, the other being New Zealand, that does not provide an explicit government guarantee for bank deposits. (page 16, The Australian Financial Review, 3 October 2008). If a bank goes under, your deposits, the Government hasn't promised it will secure your savings.

This is good and bad.

As I explained last week, the United States setup the Federal Deposit Insurance Corporation (FDIC) in the last Great Depression. It protects the first $100,000 of deposits an individual has in a bank. Last week, they (temporarily) raised the amount to $250,000. I guess this is to try and provide further confidence to the US citizen.

Earlier last week when Ireland surprised the world by issuing a Government guarantee for all bank deposits in its six largest banks, with no limit on amount covered. Most of Europe followed, with Demark, Germany, Australia, Sweden and Iceland following suit with an unlimited guarantee of bank deposits.

As I explained, if a large scale bank run occurred, FDIC or central banks around the world, would not be able to meet their obligations. The only way it would be able to, would be to fire up the printing press which would be extremely inflationary. People would get their savings back, but their purchasing power would erode significantly. So having a government guarantee isn't necessarily a good thing. There is no point guaranteeing savings, if a) it helps create hyperinflation b) people hoard money because they don't have confidence in the banks or government.

On the up side, with no government guarantee for savings in Australia, our banks have arguably been less reckless then what they could have been otherwise. Nonetheless, the situation in the US will ultimately come back to hurt Australia and the rest of the world regardless of how prudent our banks may have been in the past. FDIC has already paid billions this year to meet some small bank runs (IndyMac bank).

There is now talk, Treasurer Swan will fast track legislation to introduce a financial claims scheme, similar to FDIC, in Australia. It's all about maintaining consumer confidence - confidence in government and confidence in our monetary system.