The following is Senator Roberts’ submission to the Senate Economics Legislation Committee inquiry into the Senator’s Banking Amendment (Deposits) Bill 2020. See the media release in relation to this submission here.

Banking Amendment (Deposits) Bill 2020

I would like to thank the almost 200 submissions in support of the Banking Amendment (Deposits) Bill 2020 (the Bill). Opposition from the financial establishment has been to maintain the ambiguous wording in the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2018 (the Act).

I would advise the Committee as follows.

Summary by section

1. 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.
2. APRA’s submission requires the phrase “any other instrument” to remain to meet future developments in financial products. I agree, this bill retains that wording and adds a single modifier – ‘except retail deposits’.  APRA’s objection is moot.
3. Some submissions suggest a bail-in conflicts with Section 2A of the Banking Act which protects deposits.  This argument flounders on the effect of a bail-in, which is to save the bank.  In turn this action protects some deposits immediately and the rest are restored years hence.  The wording of 2A does not preclude a bail-in, it precludes an unsuccessful one.  
4. The IMF are on record as indicating the Crisis Resolution Powers of the 2018 Act have primacy over the general banking directions (S2A) provided in the Banking Act. These crisis powers allow APRA to order a bail-in before the FCS guarantee would start.
5. Some submissions relied on the absence of a provision in account Terms & Conditions as the explanation for why bail-in provisions do not apply to retail deposits. As banks are adding this clause to their Terms & Conditions, I would consider this objection moot.
6. APRA have indemnified bank executives for actions they may take in the implementation of emergency powers, including a bail-in.
7. Bail-in involves banks issuing new shares in exchange for the funds they take out of depositors’ accounts. This double hit – reduced goodwill towards the brand and dilution of share prices – will comprise a massive hit to our Super Funds, self-managed retirees and the more than one million Australians with bank shares.
8. Australia is obligated by membership in international banking and financial agreements to have in place a deposit bail-in capability that specifically prevents taxpayers’ money being used to save a bank. It is likely that this clause will prohibit the Treasurer from activating the FCS guarantee should a bail-in fail, simply because that is taxpayers’ money as well.

There is no doubt that the existing legislation allows for a bank bail-in. My bill asks all Senators a simple question – is this what you want? Millions of super fund members and bank shareholders await your answer.

1. The $250,000 FCS Deposit Guarantee

The Financial Claims Scheme (FCS) deposit protection was an excellent initiative from the Rudd Labor Government back in 2008.  However, things have changed since then.

The FCS is not active, and therefore “The Scheme is activated at the discretion of the Australian Treasurer”.[1] As confirmation, in 2018 APRA Chair Mr Wayne Byres addressed the Economics Legislation Committee, regarding the FCS: “Well, it’s not currently activated in the sense that it’s only activated when a bank fails…the FCS is there to make sure that particularly retail depositors but also depositors with amounts up to $250,000 are not at risk of losing their money, should a bank fail.”

The Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017, EM states: “In the unlikely event that a bank fails the Treasurer may activate the FCS…these specific depositor protections would generally only apply as a last resort, once an ADI* cannot be resolved.”

The ABC in their article on this bill raised the spectre of a run on the banks if, for instance the real estate market melts down.[2] The Government seems to have considered the impact of a bank run on the effectiveness of a bail-in, and recently added secrecy provisions to the Act so that the public would not be alerted prior to a bail-in.

Melissa Harrison’s submission 60 used the IMF’s 2019 assessment of the FCS: “The Banking Act does not compel APRA to make the appointment of a statutory manager public… As the authorities are well aware, the statutory management power should be used very cautiously as the appointment of a statutory manager could destabilize the bank by triggering or exacerbating funding runs”.[3]

A bail-in would occur prior to the FCS guarantee being authorised, with the new secrecy provisions leaving customers in the dark until their money disappears from their bank account.

A few other issues with the $250,000 guarantee are:

1. It is organised by bank by account holder. This means accounts owned by foreign citizens or entities would be bailed-in using Australian taxpayers’ funds;
2. The FCS is unfunded;
3. The FCS is limited to $20bn per bank. The Commonwealth Bank, for example, has 16 million account holders. $20bn will only cover 80,000 of those to the full $250,000. Alternatively, cover could be extended to all 16 million account holders but only for the first $1250.  

2. APRA: We need ‘any other instrument’ in the Act

From APRA’s submission 197: “We agree that if the intention of the Act was to only cover Additional Tier 1 and Tier 2 capital, an addition of ‘any other instrument’ would have been unnecessary. However… ‘any other instrument’ was included in contemplation of further classes of capital which may be added in the future.…the reference to ‘any other instrument’ was neither intended to, nor does it in fact extend to, deposits.”

*ADI = Authorised Deposit Taking Institution. For accessibility this submission uses “bank” wherever possible.

I agree with APRA that this reference is needed for future developments. This is why the wording of the bill does not remove the phrase “any other instrument”. It simply applies a single modifier “not including a deposit account” and then defines what a deposit account is.

As this clause still operates in the manner requested by APRA, their argument is moot.

Treasury have also objected to including this definition in the Act because it introduces a definition not in use elsewhere in the Act. While I feel this is clutching at straws, Treasury are free to introduce an amendment to prevent our definition being used more widely.

3. Bail-in is inconsistent with depositor protection (S2A)

From APRA’s submission 197: “APRA has broad directions powers, all of which must be used consistent with the objects of the Banking Act (particularly the paramount objective of protecting depositors). As such, APRA could not direct the insertion of a conversion or write-off provision into customer deposit accounts given such a direction would be inconsistent with the objective of depositor protection. Such a direction would be found to be invalid.”

This argument flounders on the effect of a bail-in, which is to PROTECT depositors’ funds by:

1. Converting some part of depositors’ funds to a security (forced purchase of shares in the bank) that can be converted back to funds upon sale at a future time; 
2. This saves the bank from failure and in turn, protects the remaining depositor funds;
3. 2A does not prevent a bail-in, it prevents a failed bail-in.

This bill is necessary because of the loss of amenity in the period between the funds being seized and many years down the road, when the share price recovers and the shares redeemed.  Small business, retirees, low income earners will lose homes and businesses in a bail-in.

4. IMF statements conflict with Treasury and APRA submissions

The IMF disagrees with APRA on the strength of S2A protections. An IMF report states:[4]

“The new ‘catch-all’ directions powers in the 2018 Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill provide APRA with the flexibility to make directions to the ADIs that are not contemplated by the other kinds of general directions listed in the Banking Act.”

In a February 2019 assessment of Australia’s bank resolution and crisis management, the International Monetary Fund noted:[5]

“[APRA’s] Direction powers are also a key element in the resolution process for a distressed ADI; directions can be used to implement a range of resolution options, including facilitating recapitalization. Hence, the framework allows for the possibility that a problem bank could be resolved while under private control as APRA could order an ADI to recapitalize.”

The IMF are saying that the 2018 Crisis Resolution Powers have primacy over the general directions statements in the Banking Act. These allow APRA to ‘facilitate recapitalisation’ which is the definition of a bail-in and “under private control” means before it goes bust and the $250,000 guarantee starts.

If APRA and Treasury’s submissions are correct, then the IMF is wrong.

5. Banks can’t change their Terms & Conditions to allow a bail-in

APRA submission: “While an ADI may unilaterally change terms and conditions for customer deposits, it may not do so where the change is to facilitate a conversion or write-off of customer deposits. This is because to do so would be inconsistent with unfair contract terms legislation under the ASIC Act. A term allowing an ADI to write off or convert a retail deposit would amount to an unfair contract term. Moreover, even if an ADI was not prohibited from changing its terms in this way by unfair contract terms legislation, APRA would use its powers under the Banking Act to protect depositors and prohibit an ADI from changing these terms to insert write-off provisions.”

Treasury’s submission contained the same argument.The legislation referenced actually states: “Only a court can decide whether or not a term is unfair.  “ So the legislation does NOT prevent bail-in provisions being added to Terms & Conditions. The protection comes from:

1. APRA using their oversight powers to unwind such an attempt; or
2. Affected depositors taking the might of the Australian banks to Court to get a ruling that this was indeed an unfair contract term.

Neither of these has happened. APRA has however had an opportunity to intervene when our banks started adding bail-in provisions to their Terms & Conditions. Please view submission 166 from Adams Economics, Annexe C for more.

APRA and Treasury are relying on a protection provided by APRA’s regulation powers that only exists if those powers are used.

6. APRA indemnifies bank executives who carry out a bail-in

In its 2019 assessment the International Monetary Fund noted:[6]

“Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill, provides for clearer immunity for an institution, its directors, management, employees and agents when taking reasonable steps to comply with an APRA direction…the Bill provides that a person is not liable in an action, suit or proceeding (whether criminal or civil) in relation to anything done, or omitted to be done, in good faith by the person if it is done for the purposes of complying with a direction given by APRA.”

This indemnity protects bank executives from legal action over their decision to conduct a bail-in.

7. Super Funds and self-funded retirees will be devastated

Our banks are some of the most valuable, even beloved brands in Australia. The financial damage to their share price from the loss of goodwill from a bail-in will be in the billions.

A greater loss though will come from the issuing of new shares to depositors in exchange for their savings. This dilutes the share price for existing shareholders. This is the reason for a bail-in given by the IMF – the cost of the bail-in must be worn by shareholders, not taxpayers.

Who are these shareholders if not taxpayers? Fourteen million Australians have superannuation accounts which contain a significant exposure to bank shares. There are more than a million everyday Australians who own bank shares directly.

Australia privatised our State Bank (The Commonwealth Bank) by giving everyday Australians discounted shares. Bank share ownership in Australia is the highest in the world, and our compulsory super ranks third in the world for number of people covered in percentage terms.

The IMF/G20 can champion a bail-in over a bail-out to protect taxpayers all they like. In Australia our taxpayers and our bank shareholders are one and the same.

The Government has looked the other way while banks have lent to the real estate market at the cost of compromising their loan book diversity. If it all melts down that is on the Government, not shareholders.

Government intervention by recapitalisation financed with Government bonds transferred over to the banks over time will, in the long run, not cost taxpayers money but it will avoid millions of everyday Australians getting done over by the IMF.

8. Further notes on our international obligations

Depositors are considered ‘unsecured creditors’ to a bank. This is apparent in the RBA publication ‘Depositor Protection in Australia’, which comments on “…other unsecured creditors, including depositors”.[7]

The Australian government’s 2014 ‘Financial System Inquiry Final Report’ acknowledged:[8]

“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 Financial Stability Board (FSB) is an international body that monitors and makes recommendations about the global financial system. The Board includes all G20 major economies. Australia is a member and participates in the process.

The Financial Stability Board’s (FSB) Key Attributes recommend that a resolution regime should “allocate losses to firm owners (shareholders) and unsecured and uninsured creditors (depositors)”.[9]

Australia is represented on the FSB by the Reserve Bank of Australia and Treasury and we have endorsed the FSB’s ‘key attributes’.

A further look at the ‘key attributes” reveals this provision:[10]

“The TLAC standard has been designed so that failing G-SIBs [banks] will have sufficient loss-absorbing and recapitalisation capacity available in resolution for authorities to implement an orderly resolution that minimises impacts on financial stability, maintains the continuity of critical functions, and avoids exposing public funds to loss”.

From submission 166 from Adams Economics: At the 2010 G20 Seoul Meeting, the Australian Government committed Australia to the Summit Document13, 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.”

9. Conclusion

If I may give the last word to Queensland LNP Senator Amanda Stoker. On the 5th November 2018, Senator Stoker explained in a letter to a constituent her view of the Act: 

“The legislation facilitates bail-in as a type of resolution power which is available for dealing with financial institution distress. This was done after the G20 leaders endorsed a new Financial Stability Board standard for Total Loss-absorbing Capacity.”

I thank the Senator for that clarity. Clearly the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2018 was in fact an implementation of the Financial Stability Board’s requirements for member nations to have legislation that allows a bank bail-in as a way of preventing public funds being used to bail out a bank.

Could it be that as our international agreements require bail-in rather than taxpayer funded bail-out and the Government, The Treasury and APRA have spent two years hoping nobody notices? I wonder because New Zealand have enacted their bail-in laws in the open, based on the same agreements we are signatory to.

The Government has a simple choice:

Either: Oppose our bill and admit the wording of the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2018 was indeed to give APRA the power, and the banks the right, to bail-in depositor funds. Then be honest with the electorate that banks have been given bail-in powers under a smoke screen of ambiguous wording.

Or: Pass the Banking Amendment (Deposits) Bill 2020 to give depositors confidence in their bank deposits and provide clarity for stakeholders.

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[1] Grant Turner, ‘Depositor Protection in Australia’ [2011] (December) Reserve Bank of Australia Bulletin 45-55, 51.

[2] Nassim Khadem, ‘Coronavirus crisis heightens fears bank deposits could be wiped out under ‘ambiguous’ laws’, Australian Broadcasting Corporation (online, 16 July 2020) https://www.abc.net.au/news/2020-07-16/coronavirus-crisis-heightens-fears-bank-deposits-could-be-wiped/12458462.

[3] International Monetary Fund – Monetary and Capital Markets Department, ‘Australia: Financial Sector Assessment Program-Technical Note-Bank Resolution and Crisis Management’ (Country Report No. 19/48, 21 February 2019).

[4] International Monetary Fund – Monetary and Capital Markets Department, ‘Australia: Financial Sector Assessment Program-Technical Note-Bank Resolution and Crisis Management’ (Country Report No. 19/48, 21 February 2019).

[5] International Monetary Fund – Monetary and Capital Markets Department, ‘Australia: Financial Sector Assessment Program-Technical Note-Bank Resolution and Crisis Management’ (Country Report No. 19/48, 21 February 2019).

[6] International Monetary Fund – Monetary and Capital Markets Department, ‘Australia: Financial Sector Assessment Program-Technical Note-Bank Resolution and Crisis Management’ (Country Report No. 19/48, 21 February 2019).

[7] Grant Turner, ‘Depositor Protection in Australia’ [2011] (December) Reserve Bank of Australia Bulletin 45-55.

[8] The Australian Government the Treasury, Financial System Inquiry(Final Report, 7 December 2014).

[9] Ulf Lewrick, José María Serena Garralda and Grant Turner, ‘Believing in bail-in? Market discipline and the pricing of bail-in bonds’ (Working Paper No. 831, Bank for International Settlements, December 2019).

[10] Financial Stability Board, ‘FSB issues final Total Loss-Absorbing Capacity standard for global systemically important banks’ (Press Release 74/2015, 9 November 2015).