My super fund just failed the APRA performance test. What’s next?

Failure is only the beginning.

Thirteen of Australia’s 80 closely-regulated MySuper superannuation funds have failed the APRA performance test.

There’s a fair chance you are among the one million people in them.

The results were made public on Tuesday and handed to the funds on Monday. From here on — for the people who run those funds — it’s about to get worse.

APRA is the Australian Prudential Regulation Authority. Landmark reforms introduced in response to a devastating Productivity Commission report into the “mess” that is much of Australia’s super industry require APRA to rate each MySuper fund (and from next year most other funds) with a pass or a fail according to how they have managed their members’ money.

To fail — as one in six funds have — would require the fund to have for seven or eight years managed its members’ funds so badly that when judged by its own stated investment strategy, those members would have been better off investing in the broad categories of assets themselves and paying the managers to stay away.

Under the rules, which go by the name Your Future, Your Super, funds can only be given a “pass” or a “fail”. Those that fail are required to write to their members.

Letters humbling

The letters, which have to be delivered within 28 days, and which APRA will check, are humiliating.

“Hello [fund member],” they begin. “Your superannuation product has performed poorly under an annual performance test”.

As a result, we are required to write to you and suggest that you consider moving your money into a different superannuation product.

By switching into a better performing product, you can potentially save thousands of dollars more for retirement. For example, by earning 1% higher net return over a 30‑year period, you could be 20% better off at retirement.

At the bottom of each letter is a QR code members can use to go to ato.gov.au/yoursuper to compare funds’ performance. If members log in with their MyGov account they will be told exactly what super they have and where it is (I’ve tried it and it works) and get a comparison tailored to their circumstances.

The 13 funds forced to send out these letters will be lucky to see out the year. Once a fund suffers withdrawals and has to pay out members it performs even worse. Within months, many will be taken over.

Killing season

Those that remain are unlikely to last a second year. Once a product fails for two consecutive years (most that fail in the first year are expected to fail in the second) it will be prohibited from accepting new members, which means it’ll be killed.

It may or may not be relevant, but the driving forces behind the revolution are women. Women typically do much worse out of super than men.

Karen Chester chaired the Productivity Commission inquiry that quantified the hundreds of thousands of dollars lost in retirement by each worker who stays in a dud fund, and came up with the first draft of the performance test.

Kelly O'Dwyer, as financial services minister championed it, as did her successor Jane Hume.

In charge of policing the rules is APRA executive board member Margaret Cole, who was known as the “enforcer” during her time as director of enforcement and financial crime at the UK Financial Services Authority.

On Friday she declared bluntly that Australia had too many funds, too many persistently underperforming funds and too many with fees that remain too high.

Industry funds among those failed

Among the chronic underperformers now facing a death spiral are five industry funds — two of them run by members of Industry Super Australia, the organisation that represents funds set up “only to benefit members”.

Rather, they were members. Maritime Super left just ahead of the results. LUCRF, originally set up by what is now the United Workers Union, was terminated on the release of the results. Industry Super scrubbed it from its website.

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Australian Prudential Regulation Authority

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The other industry funds that failed the performance test are run by the Australian Catholic Superannuation and Retirement Fund, Christian Super and the Victorian Independent Schools Super Fund.

Among the for-profit failures are funds run by Westpac (BT Super) and the Commonwealth Bank (Colonial First State).

The banking royal commission found that funds run by banks often pay money to other parts of the bank for services such as buying and selling bonds, rather than doing it themselves or through brokers who would get better prices.

In the dark, until now

Super customers needn’t know what happens. They don’t get bills.

Whereas electricity bills hurt when they are delivered and have to be paid, the bills for super fees (and hidden fees in the form of relentless underperformance) aren’t seen, and don’t have to be paid — the fees come out of the funds.

And the funds grow every year, even where they are squandered. Compulsory super throws in a fresh 10% of salary each year.

The aim of what’s happened this week is to make visible what is normally invisible, and to prod people into action.

An act of faith… in competition

The government could have gone down a different track.

Peter Costello, the long-serving Coalition Treasurer who now heads the Future Fund which manages government investments, wanted his successor to create a government super fund (run by his Future Fund) which it would default new workers into.

The Future Fund would have protected workers, but to do it, would have played safe. As it became dominant it would have stifled competition and the promise of better returns. Or that was the thinking.

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Read more: Super funds have been working for themselves when they should have been working for us. That's about to change

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Chester, O'Dwyer, Hume and Treasurer Josh Frydneberg decided instead to supercharge competition — to make crystal clear which are the funds to run from and the funds to run to. They are making running as easy as two clicks.

One in every 11 dollars we earn is funneled into superannuation. Legislated increases mean it will soon be one in nine.

It’s important it’s looked after.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Mortgage rates: the big four think they'll get away with it

Notice how quiet the big four banks have been since they jacked up interest rates?

Westpac added 0.20 percentage points to each of its variable mortgage rates a fortnight ago, hitting up its customers for an extra $34 a month. It'll haul in an extra $300 million a year.

On Thursday, the Commonwealth Bank raised its rates by 0.15 points. On Friday, the National Australia Bank added 0.17 points and the ANZ 0.18 points. Then St George and the Bank of Melbourne (both owned by Westpac) added 0.15 points.

Between them they'll rake in an extra $1 billion a year. In the coming week they'll unveil profits that will make ordinary businesses blush: Westpac's will be $7.8 billion, the ANZ's is expected to be $7.29 billion and NAB's $6.26 billion.

Not too long ago the banks would have defended their rate rises on the radio and television to egg each other on. Here's Westpac's then retail chief, Peter Hanlon, in 2009. He had just whacked up mortgage rates by an extra 0.20 points on top of the Reserve Bank's rise of 0.25. "All the banks in Australia face exactly the same issue, and it is a peculiarly Australian issue because we do depend too much on overseas wholesale funding," he told radio 3AW 's Neil Mitchell. "All the banks are in the same boat, but they'll obviously make their own decisions."

It was known as the mating call of the banks. Discussing prices over the phone would have been illegal, so the banks communicated by radio.

And then the government outlawed that too. Anti-price-signalling legislation means they've got to stay silent and just hope each of the others takes the hint.

This time they have...

It's true that the smaller banks won't push up rates, because they're not affected by the new tougher capital requirements, but that doesn't much worry the big four. They figured out long ago that most of us don't change banks, even when we should.

The big four say they're pushing up rates because they've been forced to hold more capital. Until now the big banks have been required to hold embarrassingly little to back up their mortgages. The Murray Financial System Inquiry found that in the event of another financial crisis, their low reserves "would be sufficient to render Australia's major banks insolvent in the absence of further capital raising".

The Prudential Regulation Authority has started asking them for more capital and will ask for more again. It says by international standards their backing is only mid-range. It wants it in the top quarter.

Tying up more capital on each loan will necessarily mean a lower return, which ought to be OK. Each loan becomes safer. Overseas that's what happens – shareholders take a hit – but not here. Our big banks believe they can widen their margins, restore their profits and maintain their payouts to shareholders.

Former treasurer Wayne Swan used to rail against the banks for this sort of behaviour: "If you're not happy with your bank, walk down the road and get a better deal."

Swan set up a bank-switching hotline, required banks to hand over lists of direct debits to departing customers, and eventually abolished mortgage exit fees, but none of it seemed to help.

Even though the smaller banks offer lower mortgage rates and accept lower returns, we're reluctant to move to them. It's true that under the cover of the global financial crisis many of them became big banks in disguise. The Commonwealth now owns BankWest and most of Mortgage Choice. Westpac owns Rams Home Loans, St George and the Bank of Melbourne.

One of the reasons we are so reluctant to switch to the small guys is our distaste for filling in forms. Going to a new bank means proving your identity all over again. It means demonstrating spending and savings habits. It means revaluing your house, and not being too old to look like a good prospect. Those who do manage it are likely to be hunted down by their old banks' retention teams and bribed to stay with the sort of low rates that ought to have been available to all of the bank's customers.

The best way to make switching easy would be complete account number portability of the kind we have for mobile phone numbers. There's no need to re-establish your identity and no need to speak to your old provider. The new one switches everything across. A review of the idea in 2011 found the technology wasn't yet available, but it must be coming closer.

And there's another, sadder, reason we are reluctant to move. Some of us are comforted by high profits. An extraordinary survey by the Australia Institute finds that one in five of the big banks' customers think high profits made them safer. They are begging to be fleeced.

We're our own worst enemies, and the big banks know it.

In The Age and Sydney Morning Herald

 

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Westpac and the Commonwealth protect mortgage profits no matter what

If the Commonwealth Bank and Westpac had been located anywhere else, they wouldn't have pushed up rates.

The Australian Prudential Regulation Authority has imposed tough new capital requirements that will require each of the big banks to back up their housing loans with more cash.

In the United States and elsewhere where this has happened the banks' shareholders simply accepted lower returns. More capital made the banks safer, less deserving of an outsized return to compensate for risk.

Not here. Westpac and the Commonwealth seem to believe their shareholders are entitled to outsized returns no matter what.

Westpac's return on shareholder funds is an astonishing 15.8 per cent. The Commonwealth's is even higher - 18.2 per cent.

In the United States, Morgan Stanley, run by Australian James Gorman, accepts high single-digit returns. In Australia recently he said investors around the world were becoming more comfortable with idea of banks holding more capital in exchange for lower earnings.

As recently as two months ago the head of the Commonwealth Bank, Ian Narev, said the same thing. "As you carry a bit more capital and wear a bit more costs, you are going to get a moderate decline in profitability," he told shareholders...

And perhaps to increase them. The best guess within official circles is that if the banks insisted on merely maintaining their profits they would have had to add the equivalent of 0.10 percentage points to the price of each loan. Because (so far) they are raising rates only on mortgages and not on business loans they would probably have to recoup a bit more from each mortgage, although not as much as 0.15 percentage points.

Westpac is lifting its variable mortgage rates by 0.20 points, the Commonwealth by 0.15 points. They are doing it in a year in which their other costs of borrowing have fallen.

The only thing that will make them think twice is losing business. The smaller banks aren't threatened with the same higher costs. They already heavily back their loans. They are in an excellent position to steal Commonwealth and Westpac customers.

The Commonwealth and Westpac think we're too lazy to make the switch.

In The Age and Sydney Morning Herald

 

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Don't wish too hard. Ralph Norris on bank costs.

Ralph Norris should be careful what he wishes for. In the heat of argument about bank margins this week the Commonwealth Bank chief said he would "tend to take the view of the Reserve Bank over the Australia Institute."

But the Bank's view is if anything tougher than the Institute's.

The Institute Tuesday pointed to figures released by the Prudential Regulation Authority APRA showing the average interest rate paid by the big Australian banks climbed more slowly than the RBA cash rate between June quarter 2009 and June 2010. It is not a surprising finding. The RBA cash rate climbed sharply between those quarters and the big banks get much of their funds from sources not linked to it.

The Reserve Bank's view is something else again. It is actually three views relating to three different time periods, none of them the period to which the APRA figures relate. Published in November just after the Bank's Melbourne Cup Day board meeting and referring to "recent months" the Bank's quarterly statement said "in aggregate, the major banks' funding costs are likely to have been little changed over recent months, though trends differ for individual banks depending on their mix of funding."

"Little changed" is far from a ringing endorsement of Norris's claim that costs are rising, and a good deal less of an endorsement than the APRA figures for the earlier period, which at least showed costs climbing...

The Bank rubbed salt into the wounds in the November Statement also publishing a longer-term analysis of the big banks' net interest margin, which is a measure of the excess they charge for what they lend over and above what they pay to get it. It dived from the late 1990s to around 2004 as the big banks faced increasing competition. Since then it stayed fairly steady. In the Reserve Bank's words it has "fluctuated in a relatively narrow range since 2004". Put more simply, bank margins are as high now as they were in 2004 (and actually higher than for some of the points in between).

The Reserve rammed home the point in its October board minutes saying the banks' spread "remained well above its pre-crisis level," meaning margins remained higher than before the crisis hit.

The November Melbourne Cup Day minutes give Norris some hope. They refer not to the past financial year or to recent months but to the present.

The board says the shares of relatively high cost funds are climbing, while the share of short-term debt is falling. This is "slowly adding to the banks' cost of funds".

But this says little more than the APRA figures cited by the Australia Institute of which Mr Norris disapproves. APRA said interest costs were climbing between the 2009 and 2010 June quarters. The Reserve Bank says they are climbing again now. Yesterday at a conference in Perth the Bank's Deputy Governor Rick Battellino said they were climbing "more than the cash rate".

But there's more to it than interest costs. During the GFC the big banks cut commissions to mortgage brokers (by about one-third) and cut marketing spending as their competitors fell away. Their profit margin matters more than their interest margin, and it soared. Between June 2009 and June 2010 it climbed from 23.1 per cent to 33.1 per cent, roughly twice as much as the smaller banks. Norris and his colleagues are doing alright.

Published in today's SMH


Related Posts

. Banks: Don't believe those APRA figures, believe these ones.

. Banks costs. They're increasing. But by less than the cash rate.

. Bank margins aren't shrinking!

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The ever-evolving guarantee

Our Treasury is working 24/7

Deutsche Bank have just provided the following update:

"In a data flash published this morning we noted that the statement on the design and operational parameters of the deposit and wholesale funding guarantee had been removed from the Treasury's website. We speculated that there could be some amendments to the design of the guarantee. The design and operational parameters have been reinstated on the Treasury's website.

There is one substantive change from the policy as previously stated and some clearer wording on another aspect.

- The substantive change is the removal of the earlier wording that "until that date [28 November 2008] the guarantees will not be available to foreign bank branches." We take the specific removal of this statement to mean that foreign bank branches (FBBs) will be covered by the guarantee from today. That is, deposits and wholesale funding eligible for the guarantee arrangements will be covered from now.

- In terms of wording, the statement makes it clearer that the $1 million fee-free threshold "applies per depositor per institution." Thus there is explicit recognition that "all types of legal entities" will be able to split their funds across multiple Authorised Deposit Taking Institutions in order to gain access to multiple fee-free thresholds.

- In our view the ability to do this could seriously undermine the intent of the threshold, which is "reduce the incentive to move funds from the short term money market into deposits." As we move into an environment of a low cash rate the incentive to avoid the fee will grow and the large number of ADIs could see money market funds make a concerted effort to spread their cash around. If this occurs then it will seriously impact on the ability of non-bank issuers to raise funding from money market funds. We think a better policy option would have been to impose a `system' cap of $1 million on the fee-free threshold. We don't think it would have been too difficult to ensure self-regulation of this requirement, certainly for the wholesale industry."

Also tonight the Treasurer has provided more money for APRA, ASIC and the Treasury. Thank goodness...

"Today the Rudd Government is announcing additional funding for the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Department of the Treasury.

This will ensure that our regulators continue to have the resources they need to maintain the strength of Australia’s financial system during the global financial crisis.

Australia’s regulators are first class and these measures will ensure that the Australian people can continue to have absolute confidence in the performance of our regulators during the global financial crisis.

Our regulators have stepped up their monitoring and other activities as the global financial turmoil has unfolded. This has been critical in ensuring the strength of Australia’s financial system, in the face of the most significant upheaval in global financial markets since the Great Depression.

The intensification of the global financial crisis over recent weeks has resulted in a greatly increased workload for our regulators. This additional funding will ensure that the regulators continue to have sufficient resources to fulfil their roles in light of global developments.

The additional funding to APRA will also enable it to respond to applications from entities seeking to become authorised deposit-taking institutions (ADIs), where they are able to meet Australia’s prudential regulatory requirements.

As ADIs these entities would be able to take deposits and would be eligible for the Government guarantee on deposits.

The additional funding totals $83 million over four years with $21.5 million in 2008-09, $43.5 million in 2009-10, $9 million in 2010-11 and $9 million in 2011-12.
Of this additional funding, APRA will receive $9 million in 2008-09 and $18.5 million in 2009-10, and $9 million in each of 2010-11 and 2011-12 to enable it to manage the effects of the global financial crisis.

This funding will be provided from the Budget, rather than being recovered from levies on the financial sector. These arrangements will be reviewed in the 2009-10 Budget context and in light of developments in global financial markets.

Of the additional funding, ASIC will receive $10 million in 2008-09 and $20 million in 2009-10 to help it manage the domestic and international implications arising from the global financial crisis.

This funding will provide ASIC with additional ‘front-line’ resources for market monitoring and enforcement activities to further strengthen confidence in Australia’s financial markets.

Of the additional funding, Treasury will receive funding of $2.5 million in 2008-09 and $5 million in 2009-10 to ensure Australia’s regulatory environment continues to be world’s best practice and to pursue reform of the global financial architecture, through the G20 and other international forums.

The Government will ensure our regulators remain appropriately resourced throughout the global financial crisis and will continue to review funding requirements as the crisis unfolds."

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The way out of the mess some say the government created

(I am not one of them)

More managed funds are suspending redemptions every few hours. One of the latest, Colonial First State is actually owned by a bank.

If I was advising the government, I'd tell it to do nothing other than help people put out by the suspensions.

The market-linked funds had a business model that was always going to go south when times got tough. Guaranteeing money in the bank is what matters.

This morning in the Age Tim Colebatch takes a different view:

"Australia cannot afford mistakes in economic policy. Kevin Rudd made one with his hasty, sweeping pledge to guarantee all bank deposits for three years. That mistake was understandable in the circumstances, but the Government's failure since to admit it and fix it is inexcusable.

Let's be clear about what happened. Rudd's aim was to avert a potential threat to the banks; instead, he overdid it, and created a real crisis for the non-banks. The reason 14 of the 20 biggest mortgage funds have now frozen their deposits is because the Prime Minister - with the Treasurer away in Washington, and without even talking to the heads of the Reserve Bank and the Australian Prudential Regulation Authority - dramatically tilted the playing field against them.

The Government had to concede its mistake and back down. Instead, on Friday it dug itself deeper into trouble by reaffirming that any bank account holding up to $1 million would be guaranteed free of charge. The threshold is so high as to be meaningless. Rudd is either getting bad advice, or not listening.

There is only one way out, which Kevin Rudd in opposition did very well: eat humble pie, admit error, fix it, and move on."

In The Australian Michael Stutchbury wants the government to:

"Impose a fee on all guaranteed deposits, not just those above $1 million. And make the guarantee optional for authorised banks, building societies and credit unions."

And on Radio National this morning David Murray, the Chairman of the Future Fund and the former head of the Commonwealth Bank said that he wanted the government to effectively end the bank guarantee after three years by charging (a lot) for it from then on. He also suggested that the government buy in to troubled funds.

I think none of these ideas would help much...

Ending or dramatically curtailing the governemnt guarantee of deposits as Tim Colebatch wants would send a confused message. Everyone knows that bank deposits are effectively guaranteed by the government. Saying that they are not guaranteed when people know that they are would do little to change behaviour, other than adding (somewhat) to fear and uncertainty.

Imposing a fee on all deposits in return for a guarantee as Michael Stutchbury wants would depress economic activity at a time when we need to support it. And the government might say that small depositors who don't pay the fee will be denied protection, but they are entitled to believe they will get protection anyway. Legend has it that the economy-class passengers on the Titanic were told in advance they would not have access to life rafts, but when the ship sank they got that access anyway.

Davidd Murray's main idea pushes the same problems out three years, and does nothing to help now. His other idea - buying into market linked funds - scares me.

It seems to me that none of these ideas will stop the rout on market-linked funds... unless the government buys into them big time as Murray suggests and effectively guarantees them.

Meanwhile, the details of the government's guarantee appear to be evolving by the hour.

Deutsche Bank's David Plank emailed his clients yesterday about details the Australian Treasury had put up on its website.

This morning he has emailed:

"In a short note published yesterday afternoon we commented on the 'Design and Operational Parameters' statement published on the Treasury's website at some point on Sunday. This statement clarified some aspects of the scheme.

However, this statement has now disappeared from the Treasury's website. Instead the website says the statement has 'been archived or updated and is no longer available.'

- At this stage we have been unable to find out why the statement has been removed. When we do so we will comment on whether any of the design features are going to be changed."

Strange days indeed.

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"Would you like a guarantee with that?"

It'll be an optional extra if your account is worth more than $1 million.

(I guess some will avoid it by simply splitting their bank deposits into a number of $1 million accounts.)

The Treasurer's announcement:

GOVERNMENT ANNOUNCES DETAILS OF DEPOSIT AND WHOLESALE FUNDING GUARANTEES

On 12 October 2008, the Rudd Government announced it will guarantee deposits in Australian owned banks, locally incorporated subsidiaries of foreign banks, credit unions and building societies for a period of three years. The Government also announced a guarantee on wholesale debt securities issued by these same institutions, on application, and for a fee.

I am today releasing further details of the guarantee arrangements following advice from the Council of Financial Regulators, which comprises the Reserve Bank Governor, the Secretary to the Treasury, and the Chairmen of the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC)...

Deposit Guarantee

As I indicated when introducing the deposit guarantee legislation in the House of Representatives last week, the Government has consulted on the interaction between the guarantee on eligible wholesale borrowing and the guarantee on deposits and whether measures are needed to clarify the intersection of these guarantees and facilitate their operation.

Today the Prime Minister and I received advice from the Council of Financial Regulators and, based on the Council’s recommendations, the Government has decided that a threshold of $1 million be implemented, over which a fee will be charged to receive the benefits of the deposit guarantee.

This fee will ensure the deposit and wholesale funding guarantees apply in a consistent manner for larger investments, for which deposits and securities are interchangeable. In particular, it will ensure that the deposit guarantee does not provide disincentives for market participants to operate in short-term money markets.

The fee will apply from 28 November 2008. Up until that date all deposits and wholesale funding eligible for the guarantee arrangements will be guaranteed without charge. After that date, deposits over $1 million and wholesale funding will only be guaranteed if the relevant fee is paid.


Fee structure

The Government has accepted the Council of Financial Regulators’ advice, to adopt a single rate fee for all maturities for eligible securities up to 60 months, with a different rate applying to eligible institutions based on their credit rating (see below).



This approach will provide an appropriate set of incentives for those ADIs who choose to use the guarantee and will minimise any unintended consequences for other debt markets.

The volatility and significant uncertainty that is evident in the current market environment means that it will be necessary for the wholesale guarantee fee arrangements to be reviewed on an ongoing basis and revised if necessary.

Other investments

The current global financial crisis is one of the most substantial shocks to the global economy seen in recent history. Australia’s long-term economic fundamentals are strong. The Government believes that these strong fundamentals should underpin investment decisions.

The Rudd Government’s action of 12 October guarantees 15 million deposit accounts, covering $800 billion, and fund raising facilities of $1.2 trillion used by financial institutions to finance small business investments and home loans.

In addition, the non-prudentially regulated investment sector also plays an important role in providing finance to the Australian economy.

The non-prudentially regulated investment sector typically includes mortgage trusts, non-listed property trusts and debentures. It provides investment capital to a range of projects (e.g. property development) and offers investment returns to retail investors. These vehicles are an important form of capital for the real economy.

Concerns have been expressed by industry about the impact of the current global financial crisis on this sector.

The Secretary to the Treasury and the Chairman of the Australian Securities and Investments Commission, in consultation with other financial regulators, are currently assessing all relevant actions that might be appropriate to foster the ongoing health and vitality of individual firms in this important sector of the economy.

This involves detailed consultation with the large number of firms delivering an array of complex investment products.

The Government has requested ASIC provide urgent advice in relation to retail investor hardship cases where redemptions may have been frozen, including using its modification powers under the Corporations Act to provide additional flexibility to fund managers and trustees.

Foreign bank branches

The Government recognises the role that foreign bank branches play in the ADI sector and that they are subject to APRA’s prudential regulation framework applicable to foreign bank branches.

In light of these considerations, I am also announcing that foreign bank branches will be able to access the guarantee for short-term wholesale funding raised from Australian residents at the same premium that applies to other ADIs. Foreign bank branches will also be able to access the deposit guarantee in respect of domestic deposits held by Australian residents on the basis of the fee schedule, but with no fee-free threshold. This arrangement will be subject to strict limits and requirements to ensure the funding is used only for their Australian operations.

The past 12 months have seen conditions in global financial markets deteriorate significantly. Australians have witnessed the failure of a number of institutions overseas and we have not been immune from the impact. The Government has taken decisive action to shore up the Australian system.

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Still up for grabs - almost everything about the deposit guarantee

The Treasurer and the PM reportedly met with the execs of the big banks last night to hammer things out, days after the RBA Governor warned that "we have been going around and around on this stuff but I think we need get something out to the markets soon".

Meantime:

The Treasurer has held open the possibility that millionaires will be able to opt out of the proposed new tax on big bank deposits.

After telling parliament on Tuesday that the fee to be charged on accounts worth more than $1 million would "be paid by all depositors in the deposit-taking institutions" he said yesterday that he was considering allowing big depositors to opt out.

"We have been consulting widely on this question and continuing a series of consultations through today and tomorrow on all of these matters," Mr Swan told parliament.

"As for the details, which have been the subject of some comment - the level above which large deposits will be treated as wholesale funding, how much the fee will be, how a fee will be structured, whether it would be flat, whether it would it be tiered, who would pay and whether it was compulsory or opt in - all those things have been on the agenda."...

He made the concession after being asked in Question Time how the fee would affect a depositor who had relying on the government's assurance that bank deposits would be guaranteed and locked in their money for a 12-month term.

When the Prime Minister announced that the government would guarantee bank deposits on October 12 he made no mention of big depositors being charged a fee.

Appearing before a Senate estimates committee the head of the Australian Prudential Regulation Authority John Laker said the announcement prompted big withdrawals from foreign-owned bank branches not covered by the scheme.

"But that was an initial reaction and I think the most recent advice I've got is that that situation is on hold pending the announcement of the details of the guarantee,'' Dr Laker told the committee.

The Shadow Treasurer Julie Bishop said the uncertainty was creating "massive confusion".

"Billions of dollars has moved from the foreign bank branches into the banks included in the guarantee," she said.

"Now I've been contacted by asset managers who say they want to take money out of the banks because they don't want to attract a fee which would be passed on to their deposit holders. They want to take the money out of the bank.Is that an intended consequence, to take money out of the banks, was that an intended consequence of the announcement of a new tax?''

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The goverment is helping, H-E-L-P-I-N-G

Get it?

The Government may be on the ropes over its decision to guarantee bank deposits, but the Opposition is going over the top.

How’s this for an overegged claim?

“The government’s own actions have caused greater instability in the Australian financial markets than any event that has occurred overseas”.

That’s from the Opposition Treasury Spokesman Julie Bishop.

What about this from the Opposition Leader Malcolm Turnbull?

“We have seen institutions not covered by the deposit guarantee losing money, we have seen funds putting a stop on redemptions, we have seen savings frozen.”

We have indeed seen those things. Perpetual, AXA and Australian Unity each put some sort of freeze on their redemptions late yesterday.

But it’s a stretch to say they did it primarily because the government guaranteed bank deposits...

Bank deposits have always been implicitly guaranteed by the government. They have always been regarded as safer than the funds run by the likes of Perpetual, AXA and Australian Unity.

Money was always going to be moved out of the Perpetuals and into the banks as soon as global financial troubles turned into a global financial crisis.

Explicitly guaranteeing bank deposits (and also deposits in building societies and credit unions) doubtless accelerated the trend. The Reserve Bank and the Prudential Regulation Authority have said so.

But it didn’t cause it. We would have had instability, a run on funds, and funds frozen without it.

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Where bipartisanship stops

At guaranteeing bank borrowings

The Opposition leader Malcom Turnbull has drawn a line in the sand on bipartisanship, making clear that stops at the government's proposal to guarantee the overseas borrowings of Australian financial institutions.

Mr Turnbull is happy with its offer to guarantee depositors’ funds. He modestly points out that he suggested a version of it. He is happy too with the plan to buy a further $4 billion of non-bank mortgages, an idea he has also championed.

But he is worried about the third element of the Prime Minister’s weekend response to the financial crisis. Underwriting the overseas borrowings of Australian banks, building societies and credit unions potentially exposes Australian taxpayers to very big losses.

“These are very large licks of money,” he said after Question Time. “We don’t know what the Commonwealth will do to make sure that that money is advanced safely.”

In Question Time he asked the Prime Minister four times how he proposed to ensure that the guarantees would not result in large bank losses being borne by the taxpayer...

The nearest Mr Rudd came to providing an answer was to say that each financial institution would be charged a fee for the guarantee determined in accordance with its individual circumstances.

Asked how the government would determine the health of each institution the Prime Minister said it would be worked out between the Treasury and economic regulators including the Australian Prudential Regulation Authority.

Mr Turnbull, himself a former merchant banker as the Australian head of Goldman Sachs, is sceptical of the ability of APRA to obtain the information.

His concerns are backed up by one of the fathers of APRA, Professor Ian Harper, now with Access Economics and in the late 1990s a pivotal member of the Wallis Inquiry which recommended its creation.

“It is clear from the legislation that Malcolm is quite right,” he said last night.

“The legislation says that APRA is there to protect the depositors of authorised deposit taking institutions. It is not there to protect the interests of wholesale creditors of the banks.”

“The Commonwealth will now become potentially a creditor of the banks. Protecting its interests is not normal business for APRA. It is a more difficult task.”

Asked whether the Treasurer could easily change APRA’s mandate, Professor Harper said he could.

“APRA is not an independent body, it answers to the Treasurer. He could legally instruct it to look for different things and ask different questions.”

But Professor Harper said such a “reconfiguration” would take time and would require more staff.

“A quicker way might be for the Commonwealth to borrow the money itself through the Office of Financial Management, and then lend the money to the banks. The AOFM is already used to examining creditworthiness.”

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