Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697646322598.pdf (Australia)
Senate Standing Committees on Economics PO Box 6100 Parliament House Canberra ACT 2600 Dear Members of the Committee and Committee Chair, I am writing to contribute a submission to the Committee’s Inquiry into the ‘Banking Amendment (Deposits) Bill 2020’.

I am writing as an Australian citizen.
The ‘Banking Amendment (Deposits) Bill 2020’ Explanatory Memorandum states: “Since the passing of the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 there have been doubts as to the meaning and intent of various provisions in the Act… This bill will avoid doubt as to the meaning and intent of various provisions in the Banking Act 1959 in relation to bail-in.” The Senate Economics Legislation Committee’s previous Inquiry into the aforementioned Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act, stated: “The committee is satisﬁed that depositors are protected both by the FCS and under the Banking Act.
Under the FCS, the Australian Government guarantees the prompt repayment of deposits at a failed Australian ADI of up to $250 000 per depositor.” (Emphasis added) In this submission, I will address a number of factors surrounding the FCS and the Banking Act 1959.

These factors support my belief that depositors are not protected in the event of a bank failure or ﬁnancial crisis, and that the “doubts” referred to in the Bill’s Explanatory Memorandum are justiﬁed.
Therefore, I believe it is imperative that the Banking Amendment (Deposits) Bill 2020 is enacted, if the government is in earnest in its claim that it intends to protect Australian depositors in the event of bank failure or ﬁnancial crisis.

FCS APPLICABLE ONLY WHEN ACTIVATED The Financial Claims Scheme (FCS) deposit protection applies only when the scheme is activated.
In 2018, APRA Chair Mr Wayne Byres addressed the Economics Legislation Committee, regarding the FCS: “Well, it's not currently activated in the sense that it's only activated when a bank fails… The FCS is there to make sure that particularly retail depositors but also depositors with amounts up to $250,000 are not at risk of losing their money, should a bank fail.” (Emphasis added) 1 The Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017, Bills Digest states: “In the unlikely event that a bank fails the Treasurer may activate the FCS… These speciﬁc depositor protections would generally only apply as a last resort, once an ADI cannot be resolved.” 2 (Emphasis added) The Senate Economics Legislation Committee’s 2018 Inquiry report into the aforementioned Bill noted: “… the Financial Claims Scheme (FCS) provides protection to deposits held in ﬁnancial institutions and to policies with general insurers in the event that a ﬁnancial institution fails.
The FCS will be activated by the Australian Government when an institution fails… The FCS aims to ensure the stability of the ﬁnancial 1 2 Hansard, Economics Legislation Committee, Estimates 01/03/2018, APRA, Wayne Byers Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017, Bills Digest No.
80, 2017-18 14 February 2018 Banking Amendment (Deposits) Bill 2020Submission 60 system as a whole following the failure of a ﬁnancial institution by protecting the interests of depositors 3 and policyholders.” (Emphasis added) It appears that the Bills Digest and the Committee’s Report diﬀer signiﬁcantly in their assurance of the activation of the FCS - may activate/will activate are substantially diﬀerent statements.

This is of great concern.


(Particularly when this issue may involve the guarantee of lifetime savings).

This discrepancy does not inspire much conﬁdence in the Committee report’s assurances about depositor protection.

Australian citizens need legal clariﬁcation over the protection of their deposits, which the ‘Banking Amendment (Deposits) Bill 2020’ will provide.

It is apparent that the Financial Claims Scheme depositor protections apply only when the FCS is activated.
Australian legislators and ﬁnancial regulators have indicated that the FCS depositor guarantee may be activated “as a last resort”- after a bank fails or is determined to be insolvent.

The Financial Stability Board (FSB), has published international guidelines for resolution/bail-in regimes, in ‘Key Attributes of Effective Resolution Regimes for Financial Institutions.’ At the 2011 Cannes Summit, G20 Heads of States and Government (including Australia) oﬃcially endorsed the Key Attributes.
4 The FSB’s Key Attributes recommend a resolution regime, “should provide for timely and early entry into resolution before a ﬁrm is balance-sheet insolvent and before all equity has been fully wiped out.” 5 (Emphasis added) If the Financial Claims Scheme depositor protection is only possibly activated when or after a bank fails, but the FSB’s Key Attributes recommend resolution (of which bail-in is one option) before a bank fails, how is the (inactive) FCS considered to be protection for depositors?
It is reasonable to conceive that bail-in (as a recapitalisation or resolution procedure) could very well occur prior to balance-sheet insolvency, and prior to the activation of the depositor guarantee promised by a latent FCS.

Indeed, the Financial Stability Board’s Key Attributes (which Australia has endorsed) recommend bail-in or other resolution prior to insolvency.
DEPOSITORS ARE ‘UNSECURED CREDITORS’ It is apparent that international and domestic ﬁnancial regulators consider that depositors are ‘unsecured creditors’ to the bank, and should expect to bear losses if a ﬁrm fails.
In the International Monetary Fund’s 2019 assessment of Australia’s resolution regime and ﬁnancial system, ‘Australia: Financial Sector Assessment Program-Technical Note-Bank Resolution and Crisis Management’, the IMF noted: ”The Australian banking sector continues to be highly concentrated and dominated by four large banks, which together hold approximately 77 percent of total banking assets… with total ﬁnancial sectors assets of about 400 percent of GDP.
The four largest banks, with largely similar business models, have been designated as domestic systemically important banks (D-SIBs) in Australia.
While their pricing power has helped to sustain strong proﬁtability, their size implies that, in the event of their failure, the impact on the financial system and the economy as a whole would be potentially enormous.” 6 (Emphasis added) 3 Senate Standing Committee on Economics, Report (2018): ‘Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017 [Provisions]’ 4 5 6 Financial Stability Board: ‘Key Attributes of Effective Resolution Regimes for Financial Institutions.’ (2014) Financial Stability Board: ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ International Monetary Fund (2019): ‘Australia : Financial Sector Assessment Program-Technical Note-Bank Resolution and Crisis Management’ Banking Amendment (Deposits) Bill 2020Submission 60 In answers to questions taken on notice for the Economics Legislation Committee’s 2018 Inquiry into the ‘Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill’, Treasury stated: “In the case of the failure of an ADI, the objectives of protecting depositors and promoting ﬁnancial system stability would be very closely aligned.
It is highly unlikely that there would be circumstances in which taking action that adversely aﬀects the interests of depositors would be conducive to promoting ﬁnancial stability in Australia.” (Emphasis added) The Senate Economics Legislation Committee’s report states: “The committee believes that the protection of depositors' interests is paramount and does not consider that the bill would allow the 'bail-in' of Australians' savings and deposits.
The stability of the ﬁnancial system depends on its depositors having conﬁdence in its ﬁnancial institutions.

By ensuring the security of depositors' savings, the overall protection of the ﬁnancial system can be ensured.” As noted by the IMF, in the event of a failure of one of Australia’s big four banks, the systemic impact on the Australian ﬁnancial system and economy as a whole could potentially be catastrophic.
Treasury’s and the Committee’s insistence that objectives to protect depositors and to promote the stability of the ﬁnancial system in Australia would always be aligned in future, is frankly unrealistic.

This belief is certainly not reﬂected in numerous previous examples of bail-in in Europe, where the savings and wealth of depositors were obviously considered expendable collateral damage.
7 Treasury’s and the Committee’s insistence also contradicts the Australian government’s 2014 ‘Financial System Inquiry Final Report’, which acknowledged: “Inevitably, failures can and will occur, the system will be exposed to crises and, at times, unsecured bank creditors [ie depositors, as per the RBA below] will be exposed to loss.” 8 Depositors are considered ‘unsecured creditors’ to a bank.
This is apparent in the RBA publication ‘Depositor Protection in Australia’, which comments on “…other unsecured creditors, including depositors…” (Emphasis added) 9 The Financial Stability Board’s (FSB) Key Attributes recommend that a resolution regime should “allocate losses to ﬁrm owners (shareholders) and unsecured and uninsured creditors.” Australia is represented on the FSB by the Reserve Bank of Australia and Treasury.

members which endorsed the FSB’s ‘Key Attributes’.


In addition, Australia was one of the G20 11 10 This recommendation also appears to be supported by the Bank for International Settlements.
In a 2019 working paper, authors stated: ”Shareholders and unsecured creditors should bear the losses if a ﬁrm fails.” (Emphasis added) 12 7 8 9 Citizen’s Party: ‘The Impact of Bail-in on Europe’ Treasury: ‘Financial System Inquiry Final Report’ (2014) Reserve Bank of Australia (2011): ‘Depositor Protection in Australia’ 10 Financial Stability Board: ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ 11 Reserve Bank of Australia, International Regulatory Forums 12 Bank for International Settlements, Lewrick et al (2019): Believing in bail-in?
Market discipline and the pricing of bail-in bonds’ Banking Amendment (Deposits) Bill 2020Submission 60 RECAPITALISATION AS BAIL-IN The Financial Stability Board’s Key Attributes recommend: ”Resolution authorities should have at their disposal a broad range of resolution powers, which should include powers to do the following… Carry out bail-in within resolution as a means to achieve or help achieve continuity of essential functions [either by] recapitalising the entity hitherto providing these functions that is no longer viable…” (Emphasis added) 13 In a February 2019 assessment of Australia’s bank resolution and crisis management, the International Monetary Fund noted: “[APRA’s] Direction powers are also a key element in the resolution process for a distressed ADI; directions can be used to implement a range of resolution options, including facilitating recapitalization.
Hence, the framework allows for the possibility that a problem bank could be resolved while under private control as APRA could order an ADI to recapitalize or to implement a recovery plan.” 14 (Emphasis added) The IMF report states: “The new ‘catch-all’ directions powers in the 2018 CMA [Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2018] provide APRA with the ﬂexibility to make directions to the ADIs that are not contemplated by the other kinds of general directions listed in the Banking Act.” The Bills Digest publication of the ‘Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017’, notes “…subsection 13E(1) empowers APRA to give an ADI a direction (called a recapitalisation direction) that requires the ADI to increase the ADI’s level of capital to the level speciﬁed in the direction in speciﬁed circumstances….
Existing subsection 13F(1) of the Banking Act provides that a recapitalisation direction may direct the ADI to issue shares, or rights to acquire shares, in the ADI or to issue other capital instruments of a kind speciﬁed in the direction.” (Emphasis added) 15 As noted by economist John Adams: “…in the midst of a ﬁnancial crisis, APRA and Australian ADIs have suﬃcient legal ﬂexibility to conduct a bail-in of retail bank deposits by stealth via: • Step 1 – amending ADI T&Cs for retail deposit accounts that would encompass requisite clauses for a bail-in to occur; 16 and • Step 2 – APRA issuing a ‘recapitalisation direction’ consistent with Division 2, section 13E of the Banking Act 1959 ordering for the bail-in to occur.
(Emphasis added) I note the Banking Act 1959 states that ‘Recapitalisation directions by APRA’ apply to companies which do not have an ADI statutory manager.

17 In 2011, the Reserve Bank of Australia noted the FCS “…is activated at the discretion of the Australian Treasurer where APRA has applied to the Federal Court for an ADI to be wound up.
This can only be done when APRA has appointed a statutory manager to assume control of an ADI and APRA considers that the ADI is insolvent and could not be restored to solvency within a reasonable period.” (Emphasis added) 18 13 Financial Stability Board: ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ 14 International Monetary Fund (2019): ‘Australia : Financial Sector Assessment Program-Technical Note-Bank Resolution and Crisis Management’ 15 Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017, Bills Digest No.
80, 2017-18 14 February 2018 16 As noted by John Adams, in 2019 a number of Australian banks updated their terms and conditions to provide signiﬁcant new legal protections that appear to provide legal immunity in the case of a bail-in event: 'Australia’s Banks Are Preparing for Bail-In of Retail Bank Deposits' 17 Banking Act 1959, 13D 18 Reserve Bank of Australia, Depositor Protection in Australia (2011) Banking Amendment (Deposits) Bill 2020Submission 60 In 2018 this changed, as noted in the Economics Legislation Committee’s report, as the new ‘Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill “seeks to increase uniformity in its approach to the wind-up of an institution by… enabling APRA to apply for the winding up of an ADI without the ADI having first been placed in statutory management.” (Emphasis added) The IMF’s 2019 assessment stated: “Prior to these changes, the determination of whether the FCS will apply was declared by the Treasurer subsequent to APRA applying to the Federal Court, while the amended Act allows the Treasurer to declare the FCS once a statutory manager has taken control of the ADI (or the general insurer), reducing the uncertainty for depositors in terms of whether the FCS will be activated…” (Emphasis added) Ongoing ‘depositor uncertainty’ may be justiﬁed.
As noted by the IMF: “The Banking Act does not compel APRA to make the appointment of a statutory manager public, nor to specify the duration of such an appointment… As the authorities are well aware, the statutory management power should be used very cautiously as the appointment of a statutory manager could destabilize the bank by triggering or exacerbating funding runs.” (Emphasis added) If APRA does not disclose the appointment of a statutory manager (which it is not legally compelled to do), or it commences the winding up or resolution of an ADI without it having ﬁrst been placed under statutory management (which it is now legally permitted to do), it appears the mechanism for the Treasurer to declare the FCS at all may remain deactivated and the public unaware either scenario has taken place.
It is conceivable that, because of the changes facilitated by the ‘Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2018’, APRA’s appointment, or lack thereof, of an ADI statutory manager may remain secret.

This information may have provided some indication of whether recapitalisation directions (ie bail-in) or the activation of the protection of the FCS, may be imminent.
The ambiguity around this scenario increases doubt about the security of depositors, aﬀecting depositor conﬁdence in the ﬁnancial system, which enactment of the ‘Banking Amendment (Deposits) Bill 2020’ would alleviate.
FCS IS NOT FUNDED The IMF’s 2019 assessment of Australia’s resolution regime noted that while “the mechanics” of a number of resolution tools had been discussed, “financing the operations either though the FCS and/or the FSSSA [Financial System Stability Special Account] have to be still worked out.” (Emphasis added) In 2018, Australian economist John Adams noted that in the matter of deposit insurance, “the Federal Government’s total ﬁnancial exposure has grown to $AUD 890 billion as of 31 December 2017… meaning that the FCS may face risks of ‘under insurance’ at the institutional level given that the institutional level of deposit insurance has not been raised from its $AUD 20 billion ceiling [per ADI]…” 19 “Under such conditions, the ability of the Federal Government to ﬁnancially meet such FCS claims when the government’s gross liabilities are currently in excess of $AUD 900 billion at the same time as when the federal budget deﬁcit would be exploding in the tens of billions of dollars due to collapsing tax revenue is highly questionable.” It is notable that Mr Adams’ assessment was written in 2018, prior to the ongoing economic shock of the coronavirus outbreak.
It is reasonable to assume that the government’s ability to ﬁnancially meet FCS claims would be even more questionable now.
19 John Adams (2018): ‘Deposit Insurance Where the Insurer Has No Money To Pay’ Banking Amendment (Deposits) Bill 2020Submission 60 Previously, in 2011, the Financial Stability Board (which includes representatives from the RBA and Treasury) noted: “The limit of AU$20 billion per ADI would not be sufficient to cover the protected deposits of any of the four major banks…” (Emphasis added) 20 The IMF’s 2019 assessment of Australia’s resolution regime noted: “In cases where the Commonwealth Government is short of cash (liquid assets) at the time of the determination, APRA may, with the Treasurer’s written approval, and on behalf of the Commonwealth, borrow money on terms and conditions speciﬁed in, or consistent with, the approval.” Adams notes: “If suﬃcient funds could not be borrowed from either domestic or international credit markets when the ﬁnancial demands on the government are acute, the Federal Government would either: • be forced to default on its obligations under the FCS; or • seek the Reserve Bank of Australia to inﬂate the money supply thereby allowing the government to borrow and meet its ﬁnancial commitments, albeit with Australian dollars that hold less purchasing power.” 21 FCS SHORTCOMINGS In 2018, APRA Chair Wayne Byres addressed the Economics Legislation Committee, regarding the FCS: “The way [the FCS] works is that, if needed, there's an appropriation that exists that can be drawn on to give depositors their money, and then there's a mechanism by which that cost is spread over the rest of the industry and recouped from the rest of the ADI sector.
So it's not a cost to the taxpayer, and it's certainly there to protect the depositors.” (Emphasis added) 22 Presumably, here Mr Byers is referring to what economist John Adams describes as the FCS’s "‘ex-post’ funding model meaning that if the FCS were activated, the Federal Government would need to pay the deposit insurance up front and then subsequently seek to recoup the funds through an imposed bank levy…” In its 2019 assessment, the IMF noted: “The stated FSSSA [Financial System Stability Special Account] goals appear to overlap now with the broadened FCS mandate in some areas, creating ambiguity.
As a way of enhancing protection for taxpayers, the Australian authorities should also consider establishing broad principles as how the Government will recover the costs of funding a resolution for the FSSSA (as it is legislated for the FCS) by establishing a priority claim on the rump ADI for funds released by the FSSSA and to impose a levy on the ﬁnancial industry as a means of making up any shortfall in recoveries.” (Emphasis added) “The Deposit Insurance Core Principles and the Key Attributes both stress the importance of ensuring that banks bear at least some of the cost of bank failures (other than via shareholder losses imposed at failure) and an ex ante funding (with a back-up line of credit from the government).
The FCS continues to fall short of these principles.
Given the high concentration of the Australian banking system and that ADIs are not required to pay ex ante or ex post premiums, the government-funded FCS eﬀectively increases moral hazard in the ﬁnancial sector.” (Emphasis added) “It should be also noted that it may take years for the Government to recover the funds, plus interest, from the banks under the current arrangement.” (Emphasis added) 20 Financial Stability Board (2011): ‘Peer Review of Australia’ 21 John Adams (2018): ‘Deposit Insurance Where the Insurer Has No Money To Pay’ 22 Hansard, Economics Legislation Committee, Estimates 01/03/2018, APRA, Wayne Byers Banking Amendment (Deposits) Bill 2020Submission 60 “As the activation of the FCS is at the discretion of the Treasurer, which is an inherent nature for ex post funded schemes, the trigger for payout could still potentially contribute to delayed payouts and introduce uncertainty to depositors (and policyholders).” BANKING ACT I note previous contention that deposits are also protected under the Banking Act 1959, particularly in the report of the Economics Legislation Committee’s Inquiry into the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017.
In answers to questions taken on notice for the Committee’s Inquiry, Treasury stated: “The use of the word ‘instrument’… is intended to be wide enough to capture any type of security or debt instrument that could be included within the capital framework in the future.
It is not the intention that a bank deposit would be an ‘instrument’ for these purposes… We do not believe… the deﬁnition could be interpreted to include bank deposits as an instrument that could be converted or written oﬀ…” 23 24 Whatever Treasury’s ‘intentions’ or ‘beliefs’ in regards to the wording of the Bill, these are not necessarily assurances in the law.
Australian attorney Mr Robert Butler has provided legal opinion on the ‘Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2018’, which contests Treasury’s statement and assertions of the Committee in its 2018 Inquiry report.

Mr Butler says: “… the Act also includes write-oﬀ and conversion powers in respect of “any other instrument”.
The Government has contended that these words do not extend to deposits, on the basis that the power only applies to instruments that have conversion or write-oﬀ provisions in their terms, which deposit accounts do not.
However, the reference to “any other instrument” would be unnecessary if the power only applied to instruments with conversion or write-oﬀ provisions; moreover, banks are able to change the terms and conditions of deposit accounts at any time and for any reason, including on directions from APRA to insert conversion or write-oﬀ provisions, which would thereby bring them within the specific terms of the write-off or conversion provisions of the Act.
The central issue is the wording of the deﬁnition in Section 11CAA quoted above and what “any other instrument” means.

“Instrument” is not deﬁned in the Act but a "ﬁnancial instrument" is deﬁned by Australian Accounting Standard AASB132 as "any contract that gives rise to a ﬁnancial asset of one entity and a ﬁnancial liability or equity instrument of another entity."
As conﬁrmed by the Reserve Bank, a deposit with an ADI bank comes under such a definition - it is a contract with terms and conditions as to the deposit being set by a bank, accepted by a depositor on making a deposit and creating a ﬁnancial asset (a right of repayment) and a ﬁnancial liability in the bank (the obligation to repay).

Deposits are created by "instruments" and are governed by the terms and conditions of those instruments.
If Section 11CAA thus extends to instruments relating to deposits then APRA can as the Prudential Regulator issue a Prudential Requirement Regulation or a Prudential Standard for the writing-oﬀ or conversion of deposits.” (Emphasis added) Mr Butler continues: “Even if the words “any other instrument” in Section 11CAA do not encompass deposits, there is a further issue in relation to the implementation of bail-in of deposits revolving around the issue of the documents/instruments issued by banks in opening accounts and accepting deposits from customers.” “The documentation issued by each Australian bank when opening such an account, has a provision which enables the Bank to change the terms and conditions from time to time without the consent of the 23 Senate Standing Committee on Economics, Inquiry into ‘Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017’, Additional Documents, Treasury 24 Mr Robert H Butler (2019): Legal opinion (via Citizen’s Party) Banking Amendment (Deposits) Bill 2020Submission 60 customer.
The speciﬁcs of the power vary from bank to bank but each fundamentally contain such a power…” “If APRA as the Prudential Regulator issued a Prudential Requirement Regulation or a Prudential Standard requiring a bank to insert a provision into its documentation/instruments relating to deposit-taking accounts providing for the bail-in of those deposits - their write-oﬀ or conversion - then those provisions would then clearly come within the speciﬁc provisions of conversion or write-oﬀ within the Act and the deposit the subject of the account could be bailed-in immediately.
Such a directive could be issued by APRA in accordance with the secrecy provisions in the Australian Prudential Regulation Authority Act 1998 and be implemented with little or no notice to the account holder.” Mr Butler notes: “The issue could now be simply resolved by Government passing a simple amendment to the Act to explicitly exclude deposits from being bailed in.” AUSTRALIA AND BAIL-IN I note previous documentation from Australian and international sources indicating that the concept or framework of bail-in has been seriously explored, and additional preparations appear to have been made for its implementation.
The Financial Stability Board’s 2019 report ‘Implementation and Effects of the G20 Financial Regulatory Reforms’, appears to acknowledge that some Australian bail-in resolution powers are already in place, although details are not clariﬁed- which reﬂects the ambiguity and doubts expressed about Australian bail- in legislation.
The FSB report states Australia has implemented resolution reforms including "one or two of the resolution powers for banks (transfer, bail-in of unsecured and uninsured credit claims, and temporary stay) and 25 insurers (transfer, bridge and run-oﬀ) are available."

(Emphasis added) The Australian Citizen’s Party (formerly the CEC) has published a wealth of documentation regarding Australian and international bail-in reforms.
I note the Citizen’s Party’s identiﬁcation of key documentation regarding a bail-in framework in Australia: • 2011: Financial Stability Board identiﬁes Australia’s ﬁnancial sector as “globally systemically important”.

, , 26 27 28 29 • 2011: Australian Government Treasury tendered two contracts with the Government Solicitor for “Tied legal advice on bail-in mechanism in Australia” , 30 31 • 2012: Treasury discussion paper, ‘Strengthening APRA’s Crisis Management Powers’.
“In this context, the FSB’s Key Attributes set out the types of resolution powers that jurisdictions should have available for dealing with ﬁnancial institution distress.
These include the need for robust statutory powers to… facilitate bail-in.” 32 25 Financial Stability Board (2019): ‘Implementation and Effects of the G20 Financial Regulatory Reforms’ 26 I am compelled observe that in the 2018 Senate Economic Legislation Committee’s Inquiry into the ‘Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017’, the CEC’s contributions were alluded to in what I believe to be a markedly disparaging manner.
It is my opinion that former Committee Chair Senator Jane Hume’s longstanding history of professional connection to the banking sector may have contributed to this.

It is unfortunate that the CEC’s contributions were apparently discounted by the Committee at that time, as their concerns about the Bill are now echoed by independent legal opinion.
27 Australian Citizen’s Party (2018): ‘Top Reasons the Banking Royal Commission must investigate APRA 28 Australian Citizen’s Party (2013) ‘The Evidence of a Bail-In Law Planned for Australia’ 29 Financial Stability Board (2011): ‘Understanding Financial Linkages: A Common Data Template for Global Systemically Important Banks’ 30 AusTender CN ID: CN361756 31 AusTender: CN ID: CN460422 32 Treasury (2012): ‘Strengthening APRA’s Crisis Management Powers Consultation Paper’ Banking Amendment (Deposits) Bill 2020Submission 60 • 2012: International Monetary Fund’s paper ‘Australia: Financial Safety Net and Crisis Management Framework-Technical Note’.
“The structure of the Australian banking sector calls into question whether extraordinary tools for resolving large ADIs may be necessary… Australia’s crisis management framework includes such measures as bridge bank, recapitalization, merger, etc., and they are exploring bail-in options.” (Emphasis added) 33 • 2012: Australian Financial Markets Association members (all ﬁnancial institutions in Australia, includes international banks).“We welcome the role of the bail-in tool for a resolution.” 34 • 2013: Financial Stability Board’s paper: ‘Implementing the FSB Key Attributes of Effective Resolution Regimes – how far have we come?’ “…or convert it into equity (“bail-in”), although legislation is in train in some jurisdictions (including Australia…” (Emphasis added) In 2018, the Citizen’s Party reviewed independent analysis conducted by ﬁnancial analyst Martin North and economist John Adams , whose evidence demonstrated that “although the terms and conditions of bank deposit accounts do not include explicit terms that allow for conversion or write-oﬀ, they do include a catch-all provision that allows the banks to change their terms and conditions any time, to include anything 35 they want, and without advance notice.” "Moreover, the banks cite ‘regulator guidance’ as one reason for doing so.
In other words, APRA can order the banks to change the terms and conditions of their deposit accounts to allow for a conversion or write- oﬀ, and a bail-in of deposits would be legal under the APRA crisis resolution powers law.” 36 In July 2019, economist John Adams noted that Australia’s ADI’s were “quietly taking action to prepare for a potential bail-in of retail bank deposits if a domestic or global ﬁnancial crisis were to occur.” “In recent weeks and months, several Australian ADIs have issued new terms and conditions (T&Cs) for 37 both retail individual and business deposit accounts… in some instances, the implemented changes by ADIs to their retail deposit account T&Cs are dramatic and reveal an underlying intention to manage risks relating to liquidity and credit worthiness beyond what is openly admitted to either by: • • • the Federal Government and Federal Parliament; federal economic regulators such as the Reserve Bank of Australia (RBA), the Australian Securities and Investment Commission (ASIC) and the Australian Prudential Regulation Authority (APRA); or the banking and ﬁnancial services industry.” Mr Adams analysed the updated terms and conditions of a number of major Australian ADIs, concluding: “Amendments to ADI T&Cs of the nature being currently implemented provides suﬃcient justiﬁcation to concerns that Australian ADIs are legally positioning to provide themselves with suﬃcient legal immunity from the imposition of capital controls or the bail-in of retail deposits.” In its 2019 assessment of Australia’s revolution regime, the International Monetary Fund noted, "The winding up of an ADI would be conducted in accordance with the Corporations Act…” The IMF notes the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill, “provides for clearer immunity for an institution, its directors, management, employees and agents when taking reasonable steps to comply with an APRA direction in case there is a concern by the company 33 International Monetary Fund (2012):
 ‘Australia : Financial Safety Net and Crisis Management Framework-Technical Note’ 34 Australian Financial Markets Association, via Treasury (2013) Submission to Strengthening APRA’s crisis management powers’ 35 John Adams and Martin North (via YouTube) 2018: ‘An Urgent “Bail-In” Update - Parliament is “Too Stupid To Be Stupid" 36 Australian Citizen’s Party (2018): ‘More evidence that APRA can ‘bail-in’ Australian bank deposits’ 37 John Adams (2018): ‘Australia’s Banks Are Preparing for Bail-In of Retail Bank Deposits' Banking Amendment (Deposits) Bill 2020Submission 60 and directors that they may breach other relevant industry acts, such as the Corporations Act… the Bill provides that a person is not liable in an action, suit or proceeding (whether criminal or civil) in relation to anything done, or omitted to be done, in good faith by the person if it is done for the purposes of complying with a direction given by APRA to a body corporate or in complying with a direction under proposed section 11CI (secrecy).
This protection extends to an oﬃcer or senior manager of the body corporate, an employee or agent of the body corporate, and to the body corporate itself or a member of a relevant group of bodies corporate of which the body corporate is also a member.” (Emphasis added) The provision of extensive immunity in the legislation for ADI representatives in complying with APRA directions (which may conceivably include a recapitalisation or unpublicised changes to ADI terms and conditions to facilitate bail-in), particularly the explicit reference to secrecy, are an interesting addition to the Bill.
It certainly appears pre-emptive and does not inspire much conﬁdence in the government’s claims (ie Treasury’s ‘beliefs’ or ‘intentions’) that depositors are protected in a ﬁnancial crisis.

The particulars noted here increase doubt about the security of depositors, which enactment of the ‘Banking Amendment (Deposits) Bill 2020’ would alleviate.
AUSTRALIA AND NEW ZEALAND The IMF’s 2019 assessment of Australia’s resolution regime makes particular note of the interconnectedness of the Australian and New Zealand banking system.

explicit bail-in regime in the world (which expressly allows for bail-in of deposits), the ‘spillover’ or contagion eﬀects may impact Australian depositors, if they do not have the protections outlined in the As New Zealand has the most 38 ‘Banking Amendment (Deposits) Bill 2020’.
The IMF notes: “The high concentration of the Australian banking sector coupled with strong presence of its banks in New Zealand calls for further strengthening of cross-border cooperation.
The New Zealand market represents the largest and most systemically critical overseas exposure of the four major Australian banks…” The IMF notes the Australian and New Zealand Memorandum of Cooperation (MOC) on the management of trans-Tasman bank distress, “underlines that the Australian participants will have responsibility for the design and implementation of capital support for the parent bank and the New Zealand participants will have responsibility for the design and implementation of capital support for the New Zealand subsidiary, but are less clear on details…” (Emphasis added) “Some major diﬀerences in the regulatory approach in resolution, followed in Australia and New Zealand, are worth noting in this context.
Australia has formal deposit insurance and New Zealand has not.

New Zealand has adopted open bank resolution, whereby a failed bank would be placed under statutory management and reopened the next business day… There is yet no consensus between the Australian and New Zealand authorities on the modalities of resolution strategies…The RBNZ, however, has focused on establishing the capacity for a stand-alone resolution of the subsidiary, using their form of bail-in.
This approach… would separate the subsidiary from the parent bank, which involves risks both for the parent and the subsidiary.” (Emphasis added) “…Australian banks diﬀer both in their exposure and inter-connectedness (sharing critical functions, etc.)
regarding their New Zealand subsidiaries, possibly implying varying parent support and spill-over effects.” (Emphasis added) The ambiguity around the resolution procedures and possible contagion or ‘spill-over eﬀects’ of systemically integrated Australian and New Zealand banks, increases doubt about the security of Australian depositors, which enactment of the ‘Banking Amendment (Deposits) Bill 2020’ would alleviate.
38 International Monetary Fund (2019): ‘Australia : Financial Sector Assessment Program-Technical Note-Bank Resolution and Crisis Management’ Banking Amendment (Deposits) Bill 2020Submission 60 BAIL-IN AND THE REAL ECONOMY The Economics Legislation Committee’s Inquiry into the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017 report states: “The stability of the ﬁnancial system depends on its depositors having conﬁdence in its ﬁnancial institutions.
By ensuring the security of depositors' savings, the overall protection of the ﬁnancial system can be ensured.” However, several years later, doubts about depositor protection have clearly not been assuaged, and additional concerns have now been expressed by independent legal opinion on the matter.
As illustrated in this submission, there are a number of concerning and dubious factors surrounding the current legislation, which do not inspire conﬁdence in the government’s assurances that Australian depositors are protected by either the Financial Claims Scheme or the Banking Act 1959.
In 2017, Thorsten Beck (Professor of Banking and Finance, Cass Business School; Research Fellow, 39 CEPR), Samuel Da-Rocha Lopes (Principal Bank Sector Analyst, European Banking Authority), and Andre Silva (Economist, Federal Reserve Board), published ‘Bank bail-in: The effects on credit supply and real economy’.

Beck et al note: “Nevertheless, the bail-in had negative real economy consequences with aﬀected ﬁrms reducing investment and employment, while increasing precautionary cash holdings....
While immediate panic and contagion eﬀects were thus avoided, resolution of a failing bank, however well done, may not completely eliminate negative effects on the real economy.” (Emphasis added) The current economic climate gives rise to the alarming possibility that signiﬁcant ﬁnancial stressors and a possible crisis may be a serious and imminent threat.
Australia simply cannot aﬀord “negative eﬀects on the real economy.” Examples of past bail-in in Europe show that the economic, ﬁnancial and social eﬀects of depositor bail-in on citizens are devastating.

40 As such, I request that the Committee recommend the Banking Amendment (Deposits) Bill 2020 be passed.
If the government is in earnest in its assurances that it intends to protect Australian depositors in the event of a ﬁnancial crisis, passing this legislation will serve to provide explicit legal clariﬁcation of the government’s stated intent.

It is my opinion that it is imperative that the Committee holds public hearings for this Inquiry, and I request that the Committee does so.
Much of the ambiguity on the matter of depositor bail-in is related to vague or ambiguous legislation, or clauses or ‘loopholes’ which are technical in nature.
The government has not been properly challenged on its ability to fund the FCS in the event of a systemic bank failure, or properly challenged on the Financial Stability Board’s assertion that: “The limit of AU$20 billion per ADI would not be sufficient to cover the protected deposits of any of the four major banks…” 41 (Emphasis added) [Note: the FSB includes representatives from the RBA and Treasury.]
I request that the Committee invites the foremost contributors to national research regarding the subject of Australian 'bail-in' legislation: Economist Mr John Adams, ﬁnancial analyst and advisor Mr Martin North, attorney Mr Robert Butler , and Research Director of the Australian Citizen's Party, Mr Robert Barwick.
(I note the Citizen’s Party has published a great deal of research over many years regarding the matter of bail- in in Australia, which this Committee has previously appeared to discount or disregard, for reasons the Committee has not made explicit.

The Citizen’s Party’s previous concerns about depositor protection are now supported by independent legal opinion on the matter.)
39 Beck et al (2017): ‘Bank bail-in: The effects on credit supply and real economy’ 40 Citizen’s Party: ‘The Impact of Bail-in on Europe’ 41 Financial Stability Board (2011): ‘Peer Review of Australia’ Banking Amendment (Deposits) Bill 2020Submission 60 Given the current environment of Australia's economy and employment situation resulting from Covid-19 mitigation measures, Australian citizens cannot aﬀord ambiguous legislation or vague assurances from the government that our deposits and ﬁnancial safety nets are protected.
The government has already required great personal sacriﬁce from Australian citizens in regards to its Covid-19 mitigation directives.

It is my opinion that in the current economic and social climate, any 'bail-in' of Australian bank deposits would spark widespread, destabilising political unrest and deep resentment and anger among Australian citizens.

I do not want this for my country.


The 'Banking Amendment (Deposits) Bill 2020' gives unequivocal assurance to Australian citizens that, even though our job prospects may have recently been materially damaged or our small business' viability destroyed by adhering to measures required by the government, at least our savings will be protected by the law.

For some Australians, particularly older Australians, their life savings are the last remaining bulwark between them and poverty and hardship.
The economic and social fallout of bail-in could be catastrophic.

Australians have a right to explicit legal clariﬁcation on the matter of depositor bail-in, and I believe that Inquiry must include hearings to ensure the investigation into this matter is robust.

I thank the Committee for their consideration.

Regards, Melissa Harrison Banking Amendment (Deposits) Bill 2020Submission 60