Presently, as part of the Financial Claims Scheme, the Government provides deposit insurance for deposits up to $250,000 using an ex-post funded scheme. An identified problem with this model is that no funds are readily available in the event of a financial failure, and the system may undermine smaller banks. The proposal is to move to an ex-ante funding model to build a Financial Stability Fund (FSF). The proposal is supported by the RBA and adopted internationally, with 88% of countries with deposit insurance funded ex ante. In designing the FSF and taking learnings from international best practice, key questions revolve around the funds scope, scale, size and design particularly as to whether the fee be flat-rate or risk-adjusted. It is also a matter to determine whether the levy’s purpose should focus primarily on bank resolution, deposit insurance, or be used broadly. As participants argued there is insufficient evidence to suggest that an ex-ante model works and could create moral hazard problems in banks, particularly when the purpose has not yet been clearly identified.
This paper was presented in July 2015 at the 20th Melbourne Money and Finance Conference (MMFC), which explored the theme The Australian Financial Sector and Global Integration.
For more papers presented in the conference, please click here.