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Senate committee backs APRA, Treasury on depositor protection James Eyers Australian Financial Review August 25, 2020 The Senate’s legislation committee has rejected a bill proposed by One Nation Senator Malcolm Roberts that would have explicitly stated that bank deposits cannot be subjected to a “bail-in” during a financial crisis (Note of the lecturer: conversion of deposits into shares). Based on assurances from Treasury and the Australian Prudential Regulation Authority, the committee said the bill was unnecessary because it is already clear that the bail-in of a bank deposit is prohibited under the current law. The Banking Amendment (Deposits) Bill 2020, backed by the fringe political party the Australian Citizens Party (previously the Citizens Electoral Council), proposed to change a section of the Crisis Management Act of 2018, dealing with the “conversion or write-off” provisions for hybrid debt instruments. (Hybrids can be “bailed-in” via a conversion to equity during a crisis.) The 2018 law added definitions relating to conversion and write-off, including stating these related to “(a) additional tier 1 and tier 2 capital; or (b) any other instrument.” The CEC argued the phrase “any other instrument” was open-ended and captured deposit accounts. After “any other instrument”, the bill proposed adding the words “not including a deposit account”. The Senate Economics Legislation Committee, chaired by Liberal Slade Brockman, agreed with the regulators this was not necessary. It found the “the explicit protection of deposits in the Banking Act – the objects clause, priority repayment, and the Financial Claims Scheme – is inconsistent with a concern deposit accounts could be subject to any kind of conversion, write-off or bail-in”. In a dissenting report, Senator Roberts said the committee had “ignored” 190 submissions and had “failed to get to the truth of the matter”. The committee received 196 submissions; most were from members, or associates, of the Citizens Party. Several feared the conversion of deposits to equity in Cyprus in 2013 could occur locally, and expressed concerns this was being pushed by the G20’s post-GFC ‘too-big-to-fail’ agenda, to protect taxpayer funds being used to support failing banks.

After reading carefully the article provided here: Question C2 take home assignment 1.pdf answer the following questions.

  1. Provide ALL the evidence found in the article showing that the text is related to bank capital notes.

(2 marks)

  1. Summarise the concern expressed by the proponent of the bill, One NationSenator Malcolm Roberts. How does this concern indirectly relate to capital notes?

(2 marks)

  1. List the arguments used in the article supporting the view that Australian depositors have no legitimate reason to be worried.

(2 marks)

  1. Represent the bail in by depositors in the rescued bank’s balance sheet. Compare and contrast with the bail in by capital notes holders. [Comment on the effect on the bank composition of debt and equity and the effect on the private money stock]

(3 marks)

  1. Assume a bail-out by a government means that a government buys new shares from the rescued bank. Discuss the effect of the bail-out if the government happens to use its account in the bank that is rescued. Compare and contrast with the bail in by depositors.

(3 marks)

  1. The government needs to collect taxes to buy the bank issued shares. Discuss whether a bail-out may be worse for depositors than a bail in by depositors.

(1 mark)


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