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What is ….. the bank guarantee?

With the recent instability in some US and Europe banking circles, it is not surprising that some Australians have concerns about the security of their savings with Australian banks.

Many may have heard about the “bank guarantee” – but what is it, what is covered, and how does it work?

But first, some trivia….

The last Australian bank failure which resulted in depositors losing money was the collapse of the Primary Producers Bank – at the height of the Great Depression in 1931.

As part of their response to the global financial crisis in 2008, the Australian government introduced a guarantee of all deposits held with Approved Deposit-Taking Institutions (ADIs). The guarantee, known as the Financial Claims Scheme (FCS), has been modified over the ensuing years, and, from 1 February 2012, the guarantee was reduced to a maximum of $250,000 per account holder, per ADI.

In developing an understanding of the FCS, it is important to grasp some key terms.

The FCS applies to deposits held with ADI, or group of ADIs.

An ADI includes Australian banks, foreign subsidiary banks, building societies, and credit unions. A list of ADIs covered by the FCS can be found here: List of authorised deposit-taking institutions covered under the Financial Claims Scheme | APRA

Some banks may operate under several different trading names under the one banking licence. The FCS, applies to each banking licence, and not to each individual trading name under a single banking umbrella.

For example, a holder of a banking license (Bank A) operates under their own name and also trades under the names of Bank B and Bank C. For the purposes of the FCS, deposits with Bank A, Bank B, and Bank C are combined.

Where a depositor has multiple accounts with the same bank, the combined value of those accounts is covered by the guarantee, up to a total of $250,000.

However, if accounts are held with different unrelated banks (i.e. separate ADIs) the guarantee applies to each ADI.

Deposits held offshore with the overseas subsidiaries of ADIs are not covered by the guarantee.

Account holder
The guarantee covers each account holder.

An account holder may be an individual, a company, a partnership, trustees of a trust, or trustees of a superannuation fund (including a self-managed superannuation fund). An account holder also includes an unincorporated association or body of persons such as a club or association.

Each account holder is covered by the guarantee. Accounts held in joint individual names (e.g. a single account held jointly by spouses, or multiple trustees of a single trust) are treated as a single account holder.

Therefore, a person who holds an account in their individual name and another account in their name as trustee of a self-managed superannuation fund is covered for up to $250,000 of deposits held by each account holder.

For members of superannuation funds, other than self-managed superannuation funds, the guarantee is offered to the trustee of the fund, and not to each individual member of the fund. Therefore, members of large superannuation funds that have retirement savings invested in the cash account of their superannuation fund, will only share proportionately in the guarantee, in the event of the guarantee being invoked under the FCS.

In the main, the Australian banking system is robust, and the added protection of the FCS offers additional security for account holders.

For additional information on the FCS, the Australian Prudential Regulatory Authority has published an extensive list of frequently asked questions on its website. It can be found here: Frequently asked questions about banking and the Financial Claims Scheme | APRA

Author: Peter Kelly, CentrePoint Alliance, 5th April 2023

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