Investors paying for guarantees

Around 50 per cent of all deposits are covered by guarantees announced by the Australian government in October 2008. The Australian Prudential Regulation Authority and the Reserve Bank of Australia estimated that around $650 billion in deposits of up to $1 million were covered under the Financial Claims Scheme.

The system of unpaid deposit insurance was introduced in a hurry to increase confidence in bank deposits at a time of extraordinary unease in financial systems worldwide generated by the second phase of the credit shock in 2008, and immediately following the collapse of Lehman Brothers one month earlier.

Another $21 billion in deposits of more than $1 million is also covered under the guarantee on wholesale liabilities, with depositors in this instance opting to pay the guarantee fee to their bank, credit union or building society.

In most cases it is investors with very conservative mandates, such as trustees and councils that are requesting, and paying for, the guarantee on deposits of more than $1 million.

Source: The Sheet