How a government guarantee protects term deposits

The Federal Government guarantee on bank deposits applies to term deposits of up to $250,000, making them one of the safest ways to save.

The Government’s Financial Claims Scheme stands ready to fund those deposits if a bank, building society or credit union becomes insolvent.

This is so unlikely that most people don’t think about it, but that wasn’t the case during the Global Financial Crisis in 2008, when banks abroad were going broke.

Although Australia’s banks were solid, they were affected by the spreading panic.
The Government leapt in to boost confidence by guaranteeing deposits to ensure our banks remained competitive with banks internationally that had a similar guarantee.

In 2012, with the crisis over, the Government modified the guarantee and passed legislation to establish the Financial Claims Scheme.

There would be a $250,000 permanent cap, per person per institution, on various types of deposit. If the scheme is ever activated, the banking regulator, the Australian Prudential Regulation Authority (APRA), aims to pay most people their money in seven days.

The scheme is of particular comfort to term deposit holders, who are prepared to loan their money to a bank for a longer period of time than other savers.

The scheme does aggregate deposits with one institution, so someone with three $100,000 deposits at one bank would be guaranteed to the $250,000 cap, not $300,000. The cap applies to one entity, so the $50,000 overcap example above would not be covered if the three deposits were held between two different brands owned by one bank.

The scheme doesn’t apply to local branches of foreign banks, foreign branches of Australian banks or to finance companies and others not regulated by APRA.

It helped Australian banks weather the Global Financial Crisis and now it stands ready, if ever needed, to support savers.

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