Regulators Slash Deposit Protection Proposal

The Age

Friday September 29, 2006

By TIM COLEBATCH, ECONOMICS EDITOR, CANBERRA

AUSTRALIA'S financial regulators have watered down their plan to provide limited guarantees for bank deposits and insurance policies, proposing a ceiling of just $20,000 a depositor if a bank goes broke.

The Reserve Bank's Financial Stability Review says the Council of Financial Regulators has put to Treasurer Peter Costello a revised proposal to compensate depositors and policyholders.

The plan is intended to provide limited protection, in place of the current no-man's land, where deposits are not guaranteed but most Australians think they are.

Community expectations have forced governments to intervene when financial institutions fail, using taxpayers' money to guarantee deposits and insurance policies. The Cain government was forced to bail out depositors in the failed Pyramid Building Society in 1990, and the Howard Government is still bailing out policyholders in the collapsed HIH insurance group.

Mr Costello has indicated support for the plan, telling The Australian Financial Review last month: "My view is that the principle is right." But the banks and insurance companies are still opposing a plan that would ultimately shift to them the risks that in effect now fall on government.

But the four-member council of regulators - Reserve Bank governor Glenn Stevens, Treasury secretary Ken Henry, Australian Prudential Regulation Authority chief executive John Laker and Australian Securities and Investment Commission chairman Jeff Lucy - has proposed two changes to its original plan, to mute the banks' opposition.

Under the original plan, put to Mr Costello last year, depositors and policyholders would have been guaranteed access to 90 per cent of their funds, normally up to a ceiling of $50,000. The money would initially be provided by the Government through APRA, but then recovered from surviving members of the industry by a levy.

In the revised scheme, the ceiling for payouts would be reduced to $20,000, except in extreme circumstances, with the scheme given first claim on the assets of the failed institution. .

© 2006 The Age

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