Rudd "doing a Cyprus."

[Parley]

The election is on !!

 

Rudd has just returned from visiting the Governor General and will soon hold a press conference.

[Floplo]

The banks will not take this from profits. They will have two ways of dealing with it. One, take it from accounts as per the criteria of those with less than 250k in the account. This is smart as it would only hit the lower end - poorer end who can not cause enough withdrawals to cause a bank run. The other is from dividends which of course hits everyone as our super funds invest a lot in the banks and so our super gets hit.

.

 

First, if a bank decides to pass it on directly they will also pull it from accounts over 250k (though maybe only for 250k) since that is the amount covered under deposit insurance. The whole point of the 250k threshold is not to screw the poor, it's the opposite, if you have less than 250k you can be certain of getting your total deposit back when the bank goes under, anything above the threshold might be lost...

 

And the 'The banks will not take this from profits.' and 'The other is from dividends' contradict each other. If a bank makes profit it either passes it on as dividend or it keeps it on its books (increasing its equity value and likely the share value), so there is no separate category 'profits' from which they could take it. It's either the customers (through fees) or the owners (through lower dividends+equity) which pay this levy. But yes depending on your personal investment profile that may either come through higher deposit fees or through lower (super) investment returns.

 

Technically over the long term the levy reduces the tax burden (since government doesn't have to directly pay for bank failure), so in the end this system helps those who don't have any substantial deposits/super investments, since they don't have to pay anymore for the insurance of everyone's deposits as they do now. So it's actually fairer than the current way.

[Floplo]

So folks in Australia ARE losing $30,000 you aren't making it clear.

 

No, they are loosing 15$ (or less) a year now so they don't lose 30000$ in case the bank goes down

[Guest The Ropey HOFF]

No, they are loosing 15$ (or less) a year now so they don't lose 30000$ in case the bank goes down

 

 

Cheers for that, so the title of this thread should be ..... Rudd isn't doing a Cyprus, lol

[Floplo]

Cheers for that, so the title of this thread should be ..... Rudd isn't doing a Cyprus, lol

 

He ain't doing a Cyprus.

 

If you are a labour supporter he is creating a better system for protecting the banking sector and the bank deposits of small savers.

If you are a coalition supporter, the whole thing looks very much like a new tax on banks and bank deposits designed to fill the holes in the budget... just nicely wrapped as deposit insurance

[VERYSTORMY]

Sorry. I disagree. We don't know yet how the banks will decide to recoup this. There is no contradiction as there is zero obligation for any company to pay a certain dividend based on a certain profit.

 

It is most likely that they will take it from dividend. Given the vast majority of bank support is via super in Oz and the vast majority of that is from managed funds, the vast majority of which are from lower economic / mid economic ends then this is a direct grab at thei investments. It makes little difference to Cyprus where people held their future living costs in direct accounts to Oz where they are held in investments into the banks. The outcome is identical.

 

As for insurance. No, this is not fair. It is well known that banks, in Oz and the rest of the world are operating in a manner that is contrary to social good. Indeed, the concept of the modern bank is new and clearly not of social, legal or economic good. That has been established. Even in Oz. It is not for the depositor to pay insurance for the banks risk in it's dealing beyond the norm. Which is exactly what what is being asked. All of the banks take part in high risk investment strategies. It should not be for the low risk investor to carry the burden.

 

Ultimately, what this highlights and what has been highlighted time and again in the last decade is that private banking does not work and never will. It is in direct opposition to the public good, it often contradicts national economic policy and offers no real benefit to society as a whole.

 

First, if a bank decides to pass it on directly they will also pull it from accounts over 250k (though maybe only for 250k) since that is the amount covered under deposit insurance. The whole point of the 250k threshold is not to screw the poor, it's the opposite, if you have less than 250k you can be certain of getting your total deposit back when the bank goes under, anything above the threshold might be lost...

 

And the 'The banks will not take this from profits.' and 'The other is from dividends' contradict each other. If a bank makes profit it either passes it on as dividend or it keeps it on its books (increasing its equity value and likely the share value), so there is no separate category 'profits' from which they could take it. It's either the customers (through fees) or the owners (through lower dividends+equity) which pay this levy. But yes depending on your personal investment profile that may either come through higher deposit fees or through lower (super) investment returns.

 

Technically over the long term the levy reduces the tax burden (since government doesn't have to directly pay for bank failure), so in the end this system helps those who don't have any substantial deposits/super investments, since they don't have to pay anymore for the insurance of everyone's deposits as they do now. So it's actually fairer than the current way.

[Floplo]

Sorry. I disagree. We don't know yet how the banks will decide to recoup this. There is no contradiction as there is zero obligation for any company to pay a certain dividend based on a certain profit. .

 

Banks have three choices on how to recoup this, first increase fees on bank deposit holders, second pay less dividends to its owners, third reduce the value of its equity. If it's option one, the bank depositors will carry the cost, if they choose two or three the bank owners (i.e. people whose super invests in banks) will carry the cost (so it doesn't matter if banks change dividends, it will hit people's super investments in both cases). My guess is that it will likely be a mix of one and three. (and if you don't want to carry the risk for bank failure, invest your super into something else than banks)

 

 

These three options concern only who pays the levy. The second dimension is what happens in the case of bank default. At the moment government promises that if a bank fails all depositors below 250k will be made whole, i.e. the government will take general tax revenue to pay the differential between the value of the deposits and the remaining assets of the failed bank. This guarantee looks exactly like an insurance paid for by general tax revenues, i.e. the general tax payer. The new system now changes who pays how much tax (the paragraph above) such that bank depositors and bank owners (your super) pay more, i.e. those who profit from this insurance. (it's more complicated but banks and thereby bank owners also profit from the guarantee)

 

I disagree with your point about private banking (and IMO the last decade hasn't really proved anything like you assert), though I am curious is your point that we shouldn't have PRIVATE banking (i.e. public banking is fine) or we shouldn't have any banking ?

[VERYSTORMY]

Yes, we need banking. Let me give you a couple of examples. At the moment, my industry is laying off a lot of staff (mineral exploration) because there is an aversion to risk. Now, what is the risk? Is it any different this year to two years ago? No. The time lag between a company putting holes in the ground, to producing ore is 10 years. Nobody, unless there under the influence can get even an approximate idea of what the metal price will be in a decade. But, the banks, in refusing to invest is causing direct negative economic conditions. Same is being seen across economies. The second example are interest rates. A central bank, moves to cut rates to stimulate the economy. But, this actually only works if the banks themselves also cut. But as we have seen repeatedly they may not. So, the policy of acting in the social good of amending economic conditions is curtailed by the banks short term views on profit.

[CrozierFamily]

I am actually very surprised that something like this was not already in place. As far as I can understand this levy will be very similar to the financial services compensation scheme in the UK that protects deposits up to around £80k per institution. The fact that the govt of Aus had protected savings up to $250k without some kind of fund to pay up if things hit the fan is very strange, because ultimatley it would be the govt (or tax payers) who would of had to pay up if a bank had gone to the wall.

 

I would be surprised if the banks in Aus directly passed on this cost to savers. I would expect them to do it in a more indirect way, with reductions in savings interest rates being more likely. I doubt even that would be the case to be honest, I would guess that most banks will just take the hit on the charge and watch it disappear in the rounding of their balance sheets. Given that the charge is very slight at a customer level, it would be hard to explain to a customer why they would be taking the direct hit on their savings. It is almost not worth it from an institutions perspective.

 

Regardless of the above, this is actually a very sensible precaution and if anything the shocking thing is that a guarantee was in place with no fund to support it.

[CrozierFamily]

Yes, we need banking. Let me give you a couple of examples. At the moment, my industry is laying off a lot of staff (mineral exploration) because there is an aversion to risk. Now, what is the risk? Is it any different this year to two years ago? No. The time lag between a company putting holes in the ground, to producing ore is 10 years. Nobody, unless there under the influence can get even an approximate idea of what the metal price will be in a decade. But, the banks, in refusing to invest is causing direct negative economic conditions. Same is being seen across economies. The second example are interest rates. A central bank, moves to cut rates to stimulate the economy. But, this actually only works if the banks themselves also cut. But as we have seen repeatedly they may not. So, the policy of acting in the social good of amending economic conditions is curtailed by the banks short term views on profit.

 

Banks really can't win can they?

 

Many people slate them for taking their eye off the risk ball during the credit crunch and blame the worlds ills on their ineptitude. Then they move to be more risk focused and knock things back (like the above) and again they get slated for not lending people money.

 

The bottom line is that banks like lending people money. They make money from that, it is their bread and butter. If they choose not to lend the money there is normally a good reason for it.

 

Maybe they feel over exposed to the minerals sector and are reducing lending in that arena to manage their exposure should a significant downturn in demand be seen in the coming years. If banks had of proactively done something like this in the housing market in places like Ireland and USA before the credit crunch, they would not have been in so much trouble.

 

People are never happy though, and it is always the big bad bankers fault.

[CrozierFamily]

Yes, we need banking. Let me give you a couple of examples. At the moment, my industry is laying off a lot of staff (mineral exploration) because there is an aversion to risk. Now, what is the risk? Is it any different this year to two years ago? No. The time lag between a company putting holes in the ground, to producing ore is 10 years. Nobody, unless there under the influence can get even an approximate idea of what the metal price will be in a decade. But, the banks, in refusing to invest is causing direct negative economic conditions. Same is being seen across economies. The second example are interest rates. A central bank, moves to cut rates to stimulate the economy. But, this actually only works if the banks themselves also cut. But as we have seen repeatedly they may not. So, the policy of acting in the social good of amending economic conditions is curtailed by the banks short term views on profit.

 

I should add that one of the reasons why banks are not passing on interest rate cuts, is because they are being forced by governments to significantly increase their capital buffers, so therefore are having to use the difference in margin to enhance their liquidity in case there is another crisis. Another sensible precaution.

 

But again, the banks are just evil. That's the easy answer.

[Floplo]

Ok, people fill books discussing these things, but just a few small thoughts why I think that your examples don't show that private banking is bad

 

- Banks don't have unlimited ressources, they can only loan out so much (and if they have less capital available, they can loan out less)

- Banks (and firms) don't know exactly what will happen in the future, but they have to change their actions if they change their expectations (i.e. if they think China will import less coal in the next ten years, then they as a consequence think the coal price will fall and projects will become unprofitable). Yes they don't know precisely what will happen in ten years, but you don't put billions into the ground without at least some predictions.

- Banks may have to change the riskiness of their investments. So if they reduce the riskiness of their investments (can happen for various reasons like regulations, some investments that didn't work out, changes in their own funding sources) then some projects might not get funded because they now appear to be too much risk (and nothing about the project has to have changed for that to happen)

- RBA interest rates are an indication how expensive it is for banks to lend money from the central bank. These funds are not the only funding source for banks (bank deposits for example are a major source), in some cases they may even be small, so unless there is also a change in their other sources they can't really pass something on

 

As a first approximation it is assumed that it is in the public interest that capital is allocated where it is most profitable (contingent on some risk preferences). This requires that somebody needs to judge how profitable investments will be. I don't think government should do that (in the short-term that might work ok, but long-term it's not going to work, see the downfall of most communist economies, China has its own quirks there), so we need free market alternatives. Banks are one of them and by linking their profits to the profitability of the investments they have a better incentive than government to pick the right projects.

 

Actually the allocation of ressources to the most profitable projects through market mechanisms is where Adam Smith's invisible hand expression comes from.

[Guest The Ropey HOFF]

Can we just clarify

 

Are alot of people in Cyprus with over €100,000 in the bank losing €20,000?

 

And are Australians starting to lose the same?