Damon Mcknight
Australian banks are considered some of the safest in the world. The country's political and economic stability is maintained by the Reserve Bank of Australia, the Australian Prudential Regulation Authority (APRA), and the Australian Securities and Investments Commission (ASIC). These bodies ensure the economy, banking system, and financial services system remain robust and secure. While no investment is entirely risk-free, the Australian Government's Financial Claims Scheme (FCS) protects deposits up to $250,000 per account holder at each licensed bank, building society, or credit union incorporated in Australia. This safety net provides peace of mind for customers, and banks also offer a range of safeguards to protect personal details and finances.
| Characteristics | Values |
|---|---|
| Country's political and economic stability | High |
| Regulatory bodies | Reserve Bank of Australia, Australian Prudential Regulation Authority (APRA), Australian Securities and Investments Commission (ASIC) |
| Safety from theft or hyperinflation | High |
| Safety from bank robbery | High |
| Financial Claims Scheme (FCS) | Protects up to $250,000 per account holder per licensed bank, building society, or credit union |
| Safety from scams | High |
| Safety from bank collapse | High |
| Interest on savings | Yes |
| Online banking and transaction cards | Yes |
| Inflation rate | 7.8% p.a. since Q4 2022 |
| CET1 capital | At least 4.5% |
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What You'll Learn
The Financial Claims Scheme (FCS)
The FCS provides protection for depositors of up to $250,000 per account holder per ADI. The scheme aims to return deposits to account holders within seven days of activation. It also covers claims of up to $5,000 from policyholders and claimants against general insurers in Australia, as well as providing protection for eligible claimants for claims above that.
The FCS can be activated by the Australian Government in the unlikely event that an ADI or general insurer fails. In the event of a failure, APRA has the role of administering the FCS.
The FCS is an important safety net for Australians, providing peace of mind that their money is protected in the event of a bank failure. It is one of the measures in place to ensure the stability of the Australian financial system.
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Reserve Bank of Australia's Committed Liquidity Facility (CLF)
The Reserve Bank of Australia's Committed Liquidity Facility (CLF) was used from 2015 to 2022 to improve the resilience of the banking system during periods of liquidity stress. The CLF was introduced due to the low level of government debt in Australia, which limited the amount of high-quality liquid assets (HQLA) that financial institutions could hold as a buffer against liquidity stress.
Under the CLF, the Reserve Bank committed to providing a set amount of liquidity to institutions, subject to them satisfying several conditions, including the payment of a fee. This fee was based on the size of the Reserve Bank's commitment and was adjusted to reflect the cost of hedging liquidity risk. The CLF was similar to an option with a strike price set 25 basis points above the cash rate target.
To be considered HQLA, securities needed to have a low-risk profile and be traded in an active and sizeable market. Australian Government Securities (AGS) and securities issued by the central borrowing authorities of the states and territories (semis) were assessed by the Australian Prudential Regulation Authority (APRA) as meeting these requirements. However, other types of Australian dollar securities, such as asset-backed securities and corporate bonds, were not classified as HQLA due to low trading volumes.
The CLF was introduced as an alternative to holding high levels of AGS and semis, which could have reduced the liquidity of those securities. APRA permitted certain banks subject to the liquidity coverage ratio (LCR) requirement to use the CLF, preventing the need for banks to hold unduly high shares of the AGS and semis markets.
In summary, the Reserve Bank's Committed Liquidity Facility was a tool used to enhance the resilience of the Australian banking system by providing liquidity support during periods of stress. It was introduced due to the low level of government debt and limited supply of HQLA in Australia, and it operated from 2015 until it was gradually phased out by the beginning of 2023.
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Scams and fraud protection
The Scam-Safe Accord is a $100 million initiative by the industry to implement a confirmation of payee system across all Australian retail banks. This will reduce scams by allowing people to confirm they are transferring money to the intended recipient. Banks have also committed to introducing new and higher protections, meaning customers should expect more warnings and delays when paying someone new or increasing payment limits.
The Australian Competition and Consumer Commission's SCAMwatch website provides information to consumers and small businesses about how to recognise, avoid, and report scams. The Australian Government's Stay Smart Online website offers simple steps that internet users can take to protect their personal and financial information online.
The Australian Financial Crimes Exchange (AFCX) is a central platform that brings together businesses, government, law enforcement agencies, and industry groups to protect Australian consumers and businesses from financial crime, cyber-crime, and scams.
In addition, individual banks are also taking steps to protect their customers from scams. For example, a Geelong Bank employee helped a customer who had been scammed file a police report, and the bank then recovered the money from its own coffers. Cairns Bank decided to notify its customers of the scams circulating in its region to keep members informed and on guard.
- Guard your identity information carefully and only provide personal details to trusted people and entities.
- Delete spam and scam emails—if the offer sounds too good to be true, it probably is.
- Keep your antivirus and firewall software up-to-date.
- Do not respond to requests that ask you to call unknown or unverified phone numbers.
- Be very careful about clicking on links in emails—do not use links to access trusted websites. Instead, enter the correct address for websites into the address bar of your browser.
- Delete suspicious messages or hang up immediately if you get a strange call.
- Verify a sender or caller’s details by directly contacting the company or agency they claim to be from on their main phone line.
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Safety of keeping money at home
While it is not unusual to keep some cash at home, it is important to be aware of the risks involved. Storing money at home puts it at risk of theft, fire, and flood damage. In the event of a home robbery, your funds could be lost forever unless you have fantastic insurance, and even then, there may be limits to how much your provider will cover.
There are ways to mitigate these risks. Firstly, it is important to keep your cash dry and intact. Watertight containers, freezer-safe zipper bags, and waterproof safes are effective ways to protect your money from water damage. A safe is the best way to protect your money from theft, and the higher the cash rating, the better quality of protection. However, it is important to note that discussing your cash storage with others may create a target for theft, so it is best to keep this information restricted to essential family members. To further reduce the chance of losing all your cash in a break-in, you can split your cash between multiple hiding places, such as a combination of safes, lockable drawers, and secure filing cabinets.
Another risk to consider when keeping money at home is the impact of inflation. Over time, your physical savings stored at home will likely lose much of their valuable purchasing power. By keeping your money in a bank, you can take advantage of interest rates that will help your savings grow.
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CET1 capital requirements
CET1 capital is the highest quality regulatory capital, and banks are expected to meet minimum CET1 ratios, as established by financial regulators. CET1 capital is considered the highest quality capital because it does not result in any repayment or distribution obligations on the institution. As a result, it is also the riskiest for capital owners (shareholders) and therefore carries the highest cost. CET1 capital is one component of total Tier 1 capital, which is used to fund a financial institution's business activities. The other component is Additional Tier 1 capital (AT1). CET1 capital is composed primarily of common stock held by a bank or other financial institution. It covers liquid bank holdings such as cash and stock.
In Australia, the Australian Prudential Regulation Authority (APRA) has implemented measures to ensure that banks hold sufficient capital. Following the country's Financial Services Inquiry (FSI), APRA announced in July 2017 that the four major Australian banks would need to have CET1 capital ratios of at least 10.5%. This was to meet the FSI's requirement that bank capital ratios are 'unquestionably strong'. APRA also applies a minimum Tier 1 capital requirement of 9.5%.
APRA's measures aim to minimise the risks to depositors and taxpayers in the event of a bank failure. This includes setting a minimum level of required capital for banks and insurers to ensure a high degree of safety. APRA also requires institutions to 'deduct' or remove certain balance sheet items that are not considered valuable in insolvency, providing a more realistic reflection of the capital cushion available during stressed conditions.
While Australia has a strong track record of political and economic stability, it is important to note that no financial investment can offer total certainty. However, keeping your money in a bank is generally considered safer than keeping it at home, as banks offer a wide range of safeguards to protect your finances and personal information.
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Frequently asked questions
Yes, Australian banks are regarded as some of the safest in the world. The country's political and economic stability helps to ensure this.
The Australian Government's Financial Claims Scheme (FCS) protects deposits up to AUD 250,000 for each account holder.
All banks, building societies and credit unions must be licensed by the Australian Prudential Regulation Authority (APRA) to operate in Australia. You can check if your bank is licensed using APRA's deposit checker.
You can take steps to avoid scams and fraud, such as not sharing your PIN, having a strong password, using two-factor authentication, and not trusting calls or emails demanding payment.
