It is hard to see too many positives in the current COVID-19 pandemic, especially when it comes to the impact it has had on business, however Australia's banks have held firm, as they generally do, during a crisis.

The strength of the big four Australian banks of National Australia Bank, Westpac, Commonwealth Bank and ANZ are due to several factors including regulatory reforms that bolstered bank capitalization and funding. These reforms resulted in many banks developing the resilience to weather a severe economic downturn, such as COVID-19. 

So what makes a bank safe?

Common Equity Tier 1 (CET1) 

CET1 is important. You may not have heard of it, but it is a capital measure introduced in 2014 to act as a precautionary means to protect the economy from a financial crisis. CET1 is component of Tier 1 capital, the primary funding source of the bank that consists mostly of shareholder equity and retained earnings. The amount of capital held by a bank illustrates the strength of a bank as a measure of financial preparedness in case of emergencies. 

The good news for Australians is Australia's banks sit well above minimum requirements of 4.50 per cent. In fact, they are in the top quartile of all banks globally. Commonwealth Bank's CET1 ratio is 17.5%, putting it in first place globally amongst all listed commercial banks with assets of more than AU$900 billion. ANZ is in third position, Westpac in fifth and NAB in eleventh spot. 

Emergency funding

Australian banks are a protected species. The Reserve Bank of Australia (RBA) gives them access to an emergency funding facility that enables them to repurchase high quality liquid assets. In March this year, just as COVID-19 was taking hold, the RBA announced the term funding facility for the banking system, with particular support for credit to small and medium-sized businesses.

"The Reserve Bank will provide a three-year funding facility to authorised deposit-taking institutions (ADIs) at a fixed rate of 0.25 per cent," RBA governor Philip Lowe said. "ADIs will be able to obtain initial funding of up to 3 per cent of their existing outstanding credit. They will have access to additional funding if they increase lending to business, especially to small and medium-sized businesses. This facility is for at least $90 billion."

Essentially, Australia's banks have RBA backing to support all customers.

Savings guarantee

If you have your savings in an Australian bank, your savings are safe.

Savings are guaranteed by the Federal Government under the Financial Claims Scheme introduced post Global Financial Crisis (GFC), which provides protection to deposits up to $250,000 held in banks, building societies and credit unions. This also extends and to policies with general insurers in the unlikely event that one of these financial institutions failed.

The guarantee means there is no need to pull your money out of the bank if you feel it is going under. Your money is guaranteed, keep both you and the bank safe.

Committed Liquidity Facility (CLF)

A CLF is another measure that assist banks to manage their liquidity risk, adding another layer of protection. The CLF Was initially introduced during the GFC, as many banks overseas faced significant liquidity problems having not paid enough attention to their liquidity management in the lead up to the crisis.

Domestic deposits

Having a high level of domestic deposits, means bank funding is stable and reliable. 

That's the technical detail, but come on, which bank is the safest?

According to a survey conducted by Global Finance, the safest bank in Australasia in 2019 was ANZ Group.

The survey showed nine out of 10 banks in the top 10 were Australian banks:

"Our Safest Banks ranking recognizes institutions that reliably deliver secure services and stability in a rapidly changing marketplace," said Global Finance publisher and editorial director Joseph D. Giarraputo. 

So, as you can see, pretty much all Australian banks are safe. If you factor in CET1, then Commonwealth is on top, but then surveys such as the Global Finance safest Bank survey tells us ANZ is on top.

It really doesn't matter who is on top in terms of safety, because your money is safe in an Australian bank.

This update is not financial advice. This article is general news and information.

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