Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697646151276.pdf (Australia)
SUBMISSION Banking Amendment (Deposits) Bill 2020 The Secretary, Senate Standing Committees on Economics, PO Box 6100, Parliament House, CANBERRA ACT 2600 (Submission to the Senate Economic Legislation Committee) I write in total and unequivocal support of the Bill before the Senate, the “Banking System (Deposits) Bill 2020” (“the Bill”) which resolves the issue as to whether the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 (“the Act”) created a power of bail-in by Australia’s banks of customers’ deposits.
The Federal Government and various Federal institutions including the Reserve Bank and Regulators have maintained that the Act either does not, or was not intended, to create a power of bail-in by Australia’s banks of customers’ deposits.
If seen in context, there is certainly an intent in many countries to introduce such a power, and bodies such as the IMF and the Bank for International Settlements which have strongly advocated the need for such a power which has been implemented in other FSB jurisdictions including New Zealand, the USA, UK, EU and Canada.
I agree with the Explanatory Memorandum that the Bill will remove doubts as to the meaning and intent of various provisions in the Act “as to the extension by the Act of power to APRA to implement, authorise or direct bail-in to deposit accounts” and will do so by “confirming that the conversion and write-off provisions introduced into the Banking Act 1959 by [the Act] do not apply to deposit accounts” and further by “confirming that nothing in the Banking Act 1959 or any other Commonwealth Act extends power to APRA to implement or authorise or direct the implementation of bail-in in respect of deposit accounts”.
“Deposit Accounts” are defined in the Bill as “an account that is kept: (a) by an account-holder (whether alone or jointly with one or more other account-holders) with an ADI; and (b) under an agreement between the account-holder and the ADI, requiring the ADI to pay the account-holder, on demand by the account-holder or at a time agreed by them, the net credit balance of the account at the time of the demand or the agreed time (as appropriate).” In brief, most retail cheque or current accounts which most Australians hold with their banks.
The Bill also defines “bail-in” - “bail-in, in relation to a deposit account, means to convert or write off the deposit account.” I also endorse the need for public hearings in respect of the Bill and the issue which it addresses.
Given the current environment of Australia's economy and employment situation exacerbated by Covid-19 mitigation measures, Australians cannot afford to face further threats to their savings or ambiguous legislation or vague assurances from authorities that deposits are protected and financial safety nets are in place.

Public hearings would at least allow for a full appreciation of the issues.
It would also allow Senators the opportunity to question all of those involved in the issues in depth and thus enable them, the public and those effected by the Act and the Bill to obtain a full understanding of the issues, and not just a bankers’, Treasury’s or Regulators’ limited focus.

Whilst not beyond doubt, it is my opinion that the provisions of the Act do provide for a power of bail-in of bank deposits which did not exist prior to the passing of the Act.
At a minimum, the Act empowers APRA to bail in so-called Hybrid Securities - special high-interest bonds evidenced by instruments which by their terms can be written off or converted into potentially worthless shares in a crisis.
Banking Amendment (Deposits) Bill 2020 submission - Page 1 - Banking Amendment (Deposits) Bill 2020Submission 150 However, the Act also includes write-off and conversion powers in respect of “any other instrument”, the Act providing in Section 11CAA Definitions: “Conversion and write-off provisions means the provision of the prudential standards that relate to the conversion or writing off of: Additional Tier 1 and Tier 2 capital; or (a) any other instrument.” (b) Tier 1 capital may be described as the primary funding source of the bank, consisting of shareholders' equity and retained earnings, and Tier 2 capital including revaluation reserves, hybrid capital instruments and subordinated term debt, general loan-loss reserves, and undisclosed reserves.
The Government has contended that the Conversion and write-off provisions definition does 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’ terms and condition for deposit accounts invariably contain provisions to enable the bank to change the terms and conditions 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 issue could now be simply resolved by Government passing a simple amendment to the Act, such as provided for in the Bill, to explicitly exclude a power in APRA to bring about the bail-in of deposits.

Bail-in is one of the 3 alternative actions which can be taken in respect of a distressed bank.

The alternatives for a distressed bank (apart from a Glass-Steagall type banking separation) are:- 1.

2.

3.
2.

3.

Bankruptcy and liquidation of the bank; Bail-out, which is the injection into the bank of the necessary capital to meet the bank’s liabilities.
This is the action which was undertaken after the 2008 GFC by governments through their Treasuries and Central Banks bailing out the banks with taxpayers’ funds; Bail-in, which is the injection into the bank of the necessary capital to meet the bank’s liabilities either by the bank writing off its liabilities to creditors or depositors or converting creditors’ loans or deposits into shares whereby creditors and depositors take a loss on their holdings.
A bail-in is the opposite of a bail-out which involves the rescue of a financial institution by external parties, typically governments that use taxpayers’ money.

The provisions of the Act as they affect bail-in require a consideration of the issue in 3 different sets of circumstances, and the provisions of the Act need to be considered separately in relation to each such set of circumstances.
Those 3 sets of circumstances are:- (i) (ii) (iii) Hybrid Securities issued by banks; Customer deposit accounts with banks; Bank documentation implementing deposit accounts.
(i) Hybrid securities The ASX describes Hybrid Securities as “a generic term used to describe a security that combines elements of debt securities and equity securities.” Whilst there are a variety of such securities, in short they are securities issued by banks which permit the amounts secured by the security to be converted into shares or written off at the option of the bank in certain circumstances.
Banking Amendment (Deposits) Bill 2020 submission - Page 2 - Banking Amendment (Deposits) Bill 2020Submission 150 The Act provides specifically for Hybrid Securities.

Section 31 adds “Subdivision B - Conversion and write off provisions” to the Banking Act 1959 and inserts a definition Section 11CAA which provides a definition of “Conversion and write off provisions” as quoted above.
The Act also inserts Section 11CAB which provides: “(1) This section applies in relation to an instrument that contains terms that are for the purposes of the conversion and write off provisions and that is issued by, or to which any of the following is a party: (a) ......

The instrument may be converted in accordance with the terms of the instrument despite: (a) any Australian law or any law of a foreign country or a part of a foreign country, an ADI; (2) other than a specified law; and (3) .....
The instrument may be written off in accordance with the terms of the instrument despite: (a) any Australian law or any law of a foreign country or a part of a foreign country; .....

Under the Basel Accord, a bank's capital consists of Tier 1 capital and Tier 2 capital which includes Hybrid Securities.
The Section 11CAB provisions mean that any law which would otherwise prevent the conversion or write-off of Hybrid Securities does not apply unless a particular legislative provision specifically provides that it does apply.
One of the principle types of legislation that this provision would be directed towards is consumer legislation, particularly those provisions which allow a Court to set aside or vary agreements if a party has been guilty of false or misleading conduct - this is precisely the sort of argument which could be raised in the circumstances referred to by outgoing Australian Securities and Investments Commission (ASIC) Chairman Greg Medcraft in an exchange with Senator Peter Whish-Wilson in the hearings of the Senate Economics Legislation Committee on 26 October 2017: Mr Medcraft said: "There are two reasons we believe a lot of the retail investors buy these securities.
One is they don't understand the risks that are in over 100-page prospectuses and, secondly - and this is probably for a lot of investors - they do not believe that the government would allow APRA to exercise the option to wipe them out in the event that APRA did choose to wipe them out."

When Senator Whish-Wilson raised the spectre of "bail-in", Mr Medcraft confirmed: "Yes, they'll be bailed in.

The big issue with these securities is the idiosyncratic risk.
Basically, they can be wiped out - there's no default; just through the stroke of a pen they can be written off.

For retail investors in the tier 1 securities - they're principally retail investors, some investing as little as $50,000 - these are very worrying.

They are banned in the United Kingdom for sale to retail.

I am very concerned that people don't understand, when you get paid 400 basis points over the benchmark [4 per cent more than normal rates], that is extremely high risk.
And I think that, because they are issued by banks, people feel that they are as safe as banks.

Well, you are not paid 400 basis points for not taking risks…" He emphasised: "I do think this is, frankly, a ticking time bomb."
The over-riding intention behind Sections 11CAB(2) and 11CAB(3) is to deal with issues arising from the examples in the comments of Graeme Thompson of APRA in an address on 10 May 1999 when he said: "... APRA will have powers under proposed Commonwealth legislation to mandate a transfer of assets and liabilities from a weak institution to a healthier one.
This is a prudential supervision tool that the State supervisory authorities have had in the past, and it has proved very useful for resolving difficult situations quickly.

We expect the law will require APRA to take into account relevant provisions of the Trade Practices Act before exercising this power, and to consult with the ACCC whenever it might have an interest in the implications of a transfer of business."
The new Sections 11CAB(2) & (3) mean that APRA does not need to consider those issues (or any other) in relation to Banking Amendment (Deposits) Bill 2020 submission - Page 3 - Banking Amendment (Deposits) Bill 2020Submission 150 conversion and write-off of Hybrid Securities.

(ii) Deposits Whether or not bail-in of other than Hybrid Securities is implemented by the Act has been the subject of debate and concern since the Bill which led to the Act was released for public submissions.
The principal area of concern is whether or not the bail-in regime was extended by the Act to deposits made by customers with banks.

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.
The intent of the reference to “any other instrument” in Section 11CAA is assisted by the Explanatory memorandum which accompanied the Exposure Draft and which states: “5.14 Presently, the provisions in the prudential standards that set these requirements are referred to as the 'loss absorption requirements' and requirements for 'loss absorption at the point of non-viability'.
The concept of 'conversion and write-off provisions' is intended to refer to these, while also leaving room for future changes to APRA's prudential standards, including changes that might refer to instruments that are not currently considered capital under the prudential standards.” Section 11AF of the Banking Act provides that APRA can determine Prudential Standards which are binding on all ADIs.
These standards are in effect regulations which have the force of legislation by virtue of the authorisation in the Banking Act.

That Section provides, inter alia: “(1) APRA may, in writing, determine standards in relation to prudential matters to be complied with by: (a) all ADIs; .....” Banks are ADIs.

The various Prudential Standards issued by APRA are accordingly headed with the phrase: "This Prudential Standard is made under section 11AF of the Banking Act 1959 (the Banking Act)."
That power then leads into the issue of APRA using this authority to expand the meaning of "capital" the subject of conversion or write-off, to encompass deposits if deposits are not already covered by the reference to “any other instrument”.

That these provisions as to conversion and write-off are not limited to Hybrid Securities is confirmed in Section 11CAA itself as quoted above.
The provisions extend to "any other instrument" by sub-section (b) of that Section and must relate to instruments other than those referred to in sub-section (a), i.e.

other than “Additional Tier 1 and Tier 2 capital” (being instruments which themselves contain an explicit provision for conversion or write-off).
All instruments that the Act refers to as being able to be converted or written off "in accordance with the terms of the instruments" come under the definition of “Additional Tier 1 and Tier 2 capital” - "any other instruments" is not only an entirely unnecessary addition if the Act is intended to apply only to instruments with conversion or write-off terms, its very broad language must be intended to encompass some other instruments (“which are not currently considered capital” as stated in the Explanatory memorandum) and that could extend to Banking Amendment (Deposits) Bill 2020 submission - Page 4 - Banking Amendment (Deposits) Bill 2020Submission 150 instruments relating to deposits.
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.

APRA already has a power to prohibit the repayment of deposits by ADIs, a power which already verges on the writing off of those deposits.
The Banking Act Section 11CA provides: “(1) ... APRA may give a body corporate that is an ADI ... a direction of a kind specified in subsection (2) if APRA has reason to believe that: ..... (b) the body corporate has contravened a prudential requirement regulation or a prudential standard; or the body corporate is likely to contravene this Act, a prudential requirement regulation, a prudential standard or the Financial Sector (Collection of Data) Act 2001, and such a contravention is likely to give rise to a prudential risk; or the body corporate has contravened a condition or direction under this Act or the Financial Sector (Collection of Data) Act 2001 ; or there has been, or there might be, a material deterioration in the body corporate's financial condition; or the body corporate is conducting its affairs in a way that may cause or promote instability in the Australian financial system.
(c) (d) .... (h) .... (k) ..... (2) The kinds of direction that the body corporate may be given are directions to do, or to cause a body corporate that is its subsidiary to do, any one or more of the following: .... (m) not to repay any money on deposit or advance; (n) not to pay or transfer any amount or asset to any person, or create an obligation (contingent or otherwise) to do so; .....” This provision was inserted into the Banking Act in 2003 by the Financial Sector Legislation Amendment Act (No 1).
It is not known whether this power has been exercised by APRA.

Relevantly Graeme Thompson in the address referred to above said: " ...

Particularly in the case of banks and other deposit-takers that are vulnerable to a loss of public confidence, APRA may prefer to work behind the scenes with the institution to resolve its difficulties.

(Such action can include arranging a merger with a stronger party, otherwise securing an injection of capital or limiting its activities for a time.)"
It is a relatively small step to then convert or write-off what the ADI has been prohibited from repaying or paying out.

It might be argued that APRA’s powers in existing Sections of the Act are not absolute and are subject to various qualifications and limitations arising out of their context within the Act or the balance of the Section or Sections of the Act in which they appear.
To avoid such an interpretation, Section 38 of the Act inserts 2 new sub-sections to Section 11CA in the Banking Act: “(2AAA) The kinds of direction that may be given as mentioned in subsection (2) are not limited by any other provision in this Part (apart from subsection (2AA)).
(2AAB) The kinds of direction that may be given as mentioned in a particular paragraph of subsection (2) are not limited by any other paragraph of that subsection.” APRA has already adopted the need for certain capital to be capable of conversion or Banking Amendment (Deposits) Bill 2020 submission - Page 5 - Banking Amendment (Deposits) Bill 2020Submission 150 write-off, regardless of laws, constitutions or contracts which may affect such decisions, the Explanatory Statement for Banking (Prudential Standard) Determination No.
1 of 2014 stating: “The Basel Committee on Banking Supervision (BCBS) has developed a series of frameworks for measuring the capital adequacy of internationally active banks.

Following the financial crisis of 2007-2009, the BCBS amended its capital framework so that banks hold more and higher quality capital (Basel III).
For this purpose, the BCBS established in Basel III more detailed criteria for the forms of eligible capital, Common Equity Tier 1 (CET1), Additional Tier 1(AT1) and Tier 2 (T2), which banks would need to hold in order to meet required minimum capital holdings.

Basel III provides that AT1 and T2 capital instruments must be written-off or converted to ordinary shares if relevant loss absorption or non-viability provisions are triggered.

Banking (prudential standard) determination No.


4 of 2012 incorporated the Basel III developments into APS 111 with effect from 1 January 2013.

...” (iii) Bank documentation implementing deposit accounts 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, invariably has a provision which enables the Bank to change the terms and conditions from time to time without the consent of the 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 Act1998 and be implemented with little or no notice to the account holder.

As noted above, the issue could now be simply resolved by Government passing a simple amendment to the Act to explicitly exclude any power of APRA to bring about the bail-in of deposits i.e.

their being written off or converted into shares.


Most Australian banks have recently changed their Terms & Conditions relating to deposit accounts, many with effect as from 1 July 2019.

Such changes have apparently been brought about by the Banking Code of Practice 2019 and arguably the Banking Royal Commission Report (which itself resulted in the changes to the Code).

The Banks have not adopted identical wording; rather, their changes are reflective of the individual Bank’s approaches.
Changes made by HSBC Australia, as an example, highlight the issues of concern surrounding bail-in.

HSBC Bank Australia Limited is part of the worldwide HSBC Group and is an Authorised Deposit-taking Institution (“ADI”) as defined in the Banking Act 1959, having been granted a banking licence in 1986.

As noted above, bail-in insofar as it relates to deposit accounts is one of the potential actions which can be taken in respect of a distressed bank.
Bail-in is the injection into the bank of the necessary capital to meet the bank’s liabilities either by the bank writing off its liabilities to Banking Amendment (Deposits) Bill 2020 submission - Page 6 - Banking Amendment (Deposits) Bill 2020Submission 150 creditors or depositors or converting creditors’ loans or deposits into shares whereby creditors and depositors take a loss on their holdings.
A bail-in is the opposite of a bail-out which involves the rescue of a financial institution by external parties, typically governments that use taxpayers’ money.

“What does bail-in do?

Bail-in allows a bank to be re-capitalized, with shareholders wiped out or diluted, and creditors will have their claims reduced or converted to shares.
As part of that framework, there will be a predefined order in terms of the seniority of claims, in order for the institution to regain viability.” - Chantal Hughes, spokeswoman for Michel Barnier, the European Commissioner for Internal Market and Services, 2012 I am of the opinion that the provisions of the Act do provide for a power of bail-in of bank deposits which did not exist prior to the passing of the Act.
In addition to the issue as to the power of bail-in introduced by the Act, there is the further issue in relation to the implementation of bail-in of deposits revolving around the terms 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, contains a provision which enables the Bank to change the terms and conditions from time to time without the consent of the 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 deposit-taking account documentation/instruments to provide for the bail-in of those deposits - their write-off or conversion - then that provision would then clearly bring the documentation/instruments within the specific conversion or write-off provisions of 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.
The Act provides for extensive immunities of ADIs and their representatives in complying with APRA directions (which would include a recapitalisation or unpublicised changes to ADI terms and conditions to facilitate bail-in and the explicit references in the Act to secrecy), would protect the ADI and its representatives from Court action and liabilities which could otherwise exist if the ADI endeavoured to unilaterally change its terms and conditions to implement bail-in.
The changes to HSBC’s Terms & Conditions so closely follow the consequences of a bail-in of customers’ deposits that they seem to anticipate such a scenario and seek to prevent a customer from taking any action against HSBC to recover or claim compensation for the customer’s resulting losses.

The relevant clause in HSBC’s Terms & Conditions is 10.7.
Prior to its 1 July 2019 changes, that clause read as follows:- “10.7 We shall not be liable to you in tort (including negligence), breach of contract, breach of statutory duty or otherwise due to, under and/or arising out of or in connection with these Terms and Conditions to the extent such loss or damage is consequential, indirect, special or punitive, whether or not you had been advised of the likelihood of any such loss or damage.” In its 1 July 2019 amended Terms & Conditions and in its Product Disclosure Statement, that clause now reads as follows:- “10.7 Both you and we will not be liable to each other for any of the following losses or Banking Amendment (Deposits) Bill 2020 submission - Page 7 - Banking Amendment (Deposits) Bill 2020Submission 150 damages (whether you or we knew or could foresee any of these losses or damages): a) loss of revenue; b) loss of actual or anticipated profits; c) loss of the use of money; d) loss of anticipated savings; e) loss of business; f) g) loss of goodwill; h) loss of reputation; or i) any indirect, consequential or tortious loss or damage however caused” loss of opportunity; Whilst the new provision seeks to provide for mutual exemptions from liability, it is difficult to see how a Bank could have claims against one of its customers for the losses referred to.
The provision is clearly directed towards exempting the bank from liability for claims made by a customer for losses incurred through the events referred to, and is not limited to losses in tort or breaches by the Bank (as was previously the case).

Each of the losses listed in the clause would follow if the Bank was to bail in that customer’s deposit accounts, although some would only follow if the customer was involved in conducting a business.
It is informative in considering those listed losses to consider the events which are considered as the “Template” for bail-in and have become synonymous with “bail-in,” the notorious policy of writing off or converting bank deposits into shares to salvage the distressed or failing banking system, and that is Cyprus in 2013.

This Submission is not the place to discuss the history of those Cyprus events, but in summary: Cyrus joined the European Union in 2004 and the Eurozone in 2008 and adopted the Euro.
On 16 March 2013 the Government announced the terms of a bail-out/bail-in agreement determined by the Troika (the European Central Bank, the European Commission, and the International Monetary Fund) and declared a bank holiday.

The policy was rejected by the Cyprus Parliament and the bank holiday was extended until 26 March 2013.

On 24 March 2013 cash withdrawal limits of €100 were imposed on accounts for the largest banks in Cyrus.
On 25 March 2013 a bail-in agreement determined by the Troika was implemented by which those depositors with over €100,000 either lost 40% of their money (Bank of Cyprus) or lost 60% (Laiki Bank) and what did remain could only be withdrawn at the rate of €300 per day (including withdrawals by businesses), with the result that all transactions thereafter could effectively only be undertaken in cash.

The process had not been gradual.


It was sudden and it was total: once it began in earnest, the banks were closed and depositors couldn't get their money out, then the bail-in regime was imposed.

For an individual, that process would involve at least, on the part of that individual (from the HSBC list of losses): c) loss of the use of money; d) loss of anticipated savings; i) any indirect, consequential or tortious loss or damage however caused.
For a business, that process could well involve on the part of that business, every one of the losses referred to in the HSBC list.

The Troika is not in a position to impose such a regime on Australian banks, but under the provisions of the Act, APRA is.

At a minimum, the Act empowers APRA to bail in so-called Hybrid Securities - special high-interest bonds evidenced by instruments which by their terms can be written off or converted into potentially worthless shares in a crisis.
As noted above, 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 Banking Amendment (Deposits) Bill 2020 submission - Page 8 - Banking Amendment (Deposits) Bill 2020Submission 150 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.
Section 11AF of the Banking Act provides that APRA can determine Prudential Standards which are binding on all ADIs.

These standards are in effect regulations which have the force of legislation by virtue of the authorisation in the Banking Act.

That power then leads into the issue of APRA using this authority to expand the meaning of "capital" the subject of conversion or write-off, to encompass deposits if deposits are not already covered by the reference to “any other instrument”.
APRA has already adopted the need for certain capital to be capable of conversion or write-off, regardless of laws, constitutions or contracts which may affect such decisions, (see the Explanatory Statement for Banking (Prudential Standard) Determination No.

1 of 2014).
1 of 2014).

The changes implemented by HSBC to its Terms & Conditions relating to Deposit Accounts would seem to be taking into account the effects of the implementation of a bail-in regime and to seek to prevent a customer from making a claim against the Bank for compensation for the losses as listed in clause 10.7 referred to above.

Such a claim would undoubtedly follow if the bank sought to unilaterally include bail-in provisions into its documentation.
Such a claim could also follow if it did so at the direction of APRA and there was any doubt as to APRA’s power to give such a direction.
The intent that the Act at least facilititaes bail-in was confirmed by Queensland LNP Senator Amanda Stoker (a person well qualified to express such an opinion being Chair of Legal and Constitutional Affairs Legislation Committee, a barrister, former prosecutor, former judge’s associate in both the Queensland Supreme Court and High Court of Australia), who explained in a 5 November 2018 letter to a constituent: explained in a 5 November 2018 letter to a constituent: “The legislation facilitates bail-in as a type of resolution power which is available for dealing with financial institution distress.
This was done after the G20 leaders endorsed a new Financial Stability Board standard for Total Loss-absorbing Capacity.

Specifically, it builds on the Key Attributes which specifies that Financial Stability Board jurisdictions should have in place legally enforceable mechanisms to implement a bail-in.
The purpose of the Total Loss-absorbing Capacity standard ensures there are mechanisms in place to stop the ‘domino effect’ and reduce loss on [sic] bank shareholders, creditors and the Government.” The International Monetary Fund noted in a February 2019 assessment of Australia’s bank resolution and crisis management, that: “[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.” “The new catch-all directions powers in the 2018 [Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill] 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.” Examples of past bail-in in Europe show that the economic, financial and social effects of depositor bail-in on citizens have been devastating.
The Act is not the first instance of the implementation of bail-in in Australia and Australia’s experience was also devastating.

A financial crisis in Australia from a potential collapse of the housing bubble means that the discussion of the policy of “bail-in” is not an academic exercise.

The bail-in of unsecured creditors, including depositors, in a distressed bank to prevent its failure is intended to ensure that a crisis in Australia’s banks does not set off a global chain-reaction meltdown.
It is argued as necessary for “financial stability”; indeed, it is being enforced globally by the Financial Stability Board based at the Bank for International Banking Amendment (Deposits) Bill 2020 submission - Page 9 - Banking Amendment (Deposits) Bill 2020Submission 150 Settlements in Basel, Switzerland.

The reality is that such a policy has and will destroy confidence in banks, which is the true basis of financial stability.
Australia experienced precisely that in 1893 when many of Australia’s banks failed following a property market collapse.

This was documented by Chris Berg in the Australian National University (ANU) College of Business & Economics journal Agendain 2015, in a paper entitled “The Curtin-Chifley Origins of the Australian Bank Deposit Guarantee”.

Australia had experienced a speculative land boom, in the 1880s, which collapsed in 1888.

By 1891 banks had started failing, which continued throughout 1892.
A financial panic erupted in January 1893, with the collapse of the Federal Bank of Australia (a private bank, despite its name).

In response to the Federal Bank’s failure, the surviving banks implemented the equivalent of a depositor bail-in.

It was this action that would turn the panic into a full-fledged banking collapse.

Berg notes that banking in Australia in those days was little regulated.
“Australia in the nineteenth century is usually described as one of the ‘free banking’ episodes in world history.

There was little that could be described as ‘prudential’ regulation.” In this context, the banks were able to orchestrate certain legal changes that allowed them to restructure themselves, called “reconstructions”, in order, they thought, to avert an ongoing collapse.

“The amended company law set the stage for the reconstructions”, Berg records.
“The Associated Banks of Victoria disavowed any mutual assistance in March 1893, which has been seen as the proximate cause of the next few months’ events.

The changes to liquidation policy encouraged banks to reconstruct: recapitalise with the funds of their depositors, in a new bank under the same name, and defer repayment of deposits.
Shareholder and depositor meetings were stacked to achieve the new majority requirement for reconstruction plans.” In effect, they implemented a bail-in of deposits, in the form of a conversion to shares or writeoff (such as legislated in the Act).

According to Berg, “the consequences of reconstruction were severe.
Of the £65 million of deposits held in banks which ultimately reopened, £9 million was converted into preference shares or interminable deposits; £42 million had been repaid by 1901, but the last repayment to depositors was made as late as 1918.” Before these reconstructions, six banks had failed in two years.
In the two months of April and May 1893, following the March 1893 reconstruction/bail-in, the following banks collapsed: the Australian Joint Stock Bank; the Commercial Bank of Australia; the English, Scottish and Australian Chartered Bank; the Bank of North Queensland; the Brisbane Permanent Building and Banking Company; the City of Melbourne Bank; the Commercial Banking Company of Sydney; Federal Building, Land, and Investment Society, Limited, and Deposit Bank; the National Bank; the Queensland National Bank; and the Royal Bank of Queensland.
Berg quotes David Pope’s 1987 paper “Bankers and banking business”, which argued that the bank collapses were a policy-induced crisis, from the bail-in/reconstructions, as opposed to resulting from the economic conditions: “One interpretation of the ‘crash’ of AprilMay 1893 is of a rush by banks to seize the vantage ground offered by reconstruction.” “The trauma of this banking crisis cast a long shadow”, Berg wrote.
“[G.D. Meudell in The Romance of Australian Banking, 1927] reflected decades later that ‘France had her political terror in 1793 and Australia her financial terror in 1893’.

In March 2013, the European Central Bank, EU and IMF, together known as the “Troika”, ordered the “bail-in” of deposits in Cyprus.

This was the first sign of the development of the bail-in policy, which shocked the world.
Suddenly, depositors were told they were “unsecured creditors”, instead of people who had entrusted their savings with banks for safe-keeping.
A month later, on 26 April 2013, the former deputy director of the Japanese Ministry of Finance, Daisuke Kotegawa, addressed an international conference in Germany, and attacked Banking Amendment (Deposits) Bill 2020 submission - Page 10 - Banking Amendment (Deposits) Bill 2020Submission 150 the bail-in policy for the precise reason that Australia experienced in 1893 - this policy to save banks will actually destroy banking.
Kotegawa attacked the Troika’s Cyprus policy: “They have been trying to introduce a system whereby depositors are also asked to lose part of their deposits.

This will completely destroy confidence in the financial system, and thereby aggravate the financial crisis.

“So, I can’t understand why people in Brussels should use this kind of stupid policy, which in everybody’s eyes, at a glance, is a completely wrong policy for maintaining the confidence in the financial system.

“Let me elaborate why.


As you know, a bank can operate as long as it maintains 10 per cent of its total assets as equity.

The essence of the banking business is this creation of confidence.

Take an example whereby a bank has total assets of 100 million.

It does not need to keep 100 million available for payment, because, as long as confidence in the system is sustained, depositors would not demand their deposits back in an instant.
The difference between the 100 million and the requirement of 10 million can be used as the source of lending, in addition to the equity held by the bank.

“The policy taken by the EU completely destroys such confidence.

It violates the basic notion of how a bank can exist and operate.
I hope that this kind of policy, which has been advised by Brussels, will be reversed as soon as possible, because this will have tremendous contagion effects for the other countries in question.” Lastly, I would like to comment on the statements repeated by Governments and banks that “Australian bank deposits are guaranteed by the Federal Government under the Financial Claims Scheme (“FCS”).
The Australian Federal Government introduced the FCS in October 2008 to restore confidence in the banking system in the wake of the Global Financial Crisis (GFC) to prevent a full-scale bank run.

By way of example of such unequivocal statements, the Senate Economics Legislation Committee’s previous Inquiry into 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.” There is a widespread misconception that bank deposits are currently guaranteed for at least up to $250,000.
To many Australians who are aware of the existence of the FCS and the possibility of bail-in, an ensuing belief exists that deposits spread across multiple financial institutions below the $AUD 250,000 FCS threshold is requisite protection against possible deposit confiscation.

However, this belief confuses the role of the FCS in the process when an ADI experiences financial difficulty.
The Financial Claims Scheme (FCS) through which APRA administers the guarantee has not yet been activated, as the FCS website clearly states: “The FCS can only come into effect if it is activated by the Australian Government when an institution fails.

Once activated, the FCS will be administered by the Australian Prudential Regulation Authority (APRA).” That is, when a bank fails, i.e.
becomes insolvent, and APRA determines to make an application to have the bank wound up, the Australian Government then has the discretion to decide whether or not to activate the FCS.

Whether or not the FCS is adequately funded (which it is not) is another issue.

A determination to wind up a bank would only be made if the bank was unsuccessful in securing requisite capital that would allow it to become an on-going concern and continue with normal operational banking activities.
Accordingly, an ADI that is successful in Banking Amendment (Deposits) Bill 2020 submission - Page 11 - Banking Amendment (Deposits) Bill 2020Submission 150 recapitalising through obtaining new funds either through a bail-out (an external injection of capital) or a bail-in (the conversion or writing-off of creditors'/depositors ' funds) and does not fail, will not trigger an event that results in the activation of the FCS.
Hence, it should be emphasized that Bank deposits are not protected or guaranteed at all and bail-in can be considered as a mechanism that allows the Federal Government to avoid being directly financial liable under the FCS.

This quite apait from the consequence that if a deposit account is bailed-in then there is no amount to be covered by the FCS to the extent of the amount so bailed-in even if the FCS is activated.
In 2018, Australian economist John Adam s noted that in relation to the FCS, "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} ... " "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 201 8, prior to the ongoing economic shock of the coronavirns outbreak.

It is reasonable to assume that the government's ability to financially meet FCS claims would be even more questionable now.

I would be happy to expand fmt her on any of the matters raised in this Submission.

In conclusion: 1.

2.

3.

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5.


I totally and unequivocally suppo1t the Bill before the Senate, the "Banking Amendment (Deposits) Bill 2020"; I totally and unequivocally support the need for clarification of the application of the concept of bail-in to Australian bank deposit accounts; I endorse and advocate the need for public hearings in respect of the Bill and the issue which it addresses; I endorse and advocate the need for the publication of all submissions lodged with the Committee.
I would suggest that at any time, a clarification of any uncertainty in laws should be resolved but given the CUITent environment of Australia's economy and employment situation resulting from Covid-1 9 mitigation measmes, and great personal sacrifice from Australian citizens in regards to mitigation directives, clarification becomes even more critical for Australians, pruticularly older Australians, whose life savings are the last remaining bulwark between them and possible pove1ty and hardship.
Australians need explicit legal clarification on the matter of depositor bail-in.

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