NAT: Body Corporate Money Should Only Be Invested In Banks

This article is about investing body corporate money.

Question: Body Corporate money should only be invested in banks whose deposits are guaranteed by the federal government. Other investment vehicles will not be government guaranteed and money will be lost.

Body Corporate money should only be invested in banks whose deposits are guaranteed by the federal government. There should be no amount invested in one bank that exceeds $250,000. The government only guarantees deposits by one depositor up to that amount.

Investment vehicles that may be created will not be government guaranteed and money will be lost.

Answer: As a long-term saver you have to ask yourself whether the opportunity cost of absolute protection from bank failure is worth the additional contributions needed to make up the difference between low interest and high inflation rates.

Government guarantees (more formally known as the Financial Claims Scheme (FCS) in Australia) are an interesting and globally, a quite common component of well governed financial systems. Predominately borne out of the chaos and uncertainty of the 2008 Global Financial Crisis, the aim was to sure up confidence in the nations banking system and prevent large scale drawdowns (called ‘runs on the bank’) that remove the capital held by the bank and eventually will seize up its ability to function.

In response to the investor confidence panic in the wake of the GFC, on 12 October 2008, the Government announced temporary arrangements to enable the provision of a guarantee for the deposits and wholesale funding of Australian ADIs.

Up until 1 February 2012, deposits up to and including $1 million in eligible ADIs — including banks, buildings societies and credit unions — were guaranteed by the Government without charge under its Financial Claims Scheme (FCS). Since then, a new permanent cap of $250,000 per person per institution on deposits guaranteed under the FCS took effect from 1 February 2012.

So, what does this mean to the average Australian? The answer lies upon several considerations and its true value is based on probabilities.

It is very reassuring to know that, in the event of a bank collapse, a fixed amount (which hasn’t changed since 2012) will be swiftly printed at the Reserve Bank of Australia and handed back to you.

However, as (recent) history has shown, the propensity and desire at both a fiscal (Federal Govt) and monetary (Reserve Bank) level to protect the economy through stimulus almost make the FCS irrelevant. If a bank was going to collapse, COVID should have done it, and yet here we are with most major banks posting record profits! The major Australian banks are some of the best run in the world, and periods like 2020/21 are proof of their good governance.

The rub is that the deposit holders, the very people that the FCS is designed to protect, wear the impacts of huge stimulus through higher inflation and minimal rates of return on their savings. On top of that, it does not come for free, with the industry liable for any shortfall paid by the Government after liquidating a bank, by way of a special levy in the event of the scheme being triggered. Not many guesses are required to work out who ultimately will be wearing those costs.

The FCS is an important failsafe in ensuring continued confidence in our banks, no question. As a long-term saver however, you have to ask yourself whether the opportunity cost of absolute protection (up to $250,000 per account) from bank failure is worth the additional contributions needed to make up the difference between low interest and high inflation rates. This is especially the case over extended periods when the differential compounds the problem.

So, when considering shorter term savings, usually in alignment with your 10 year maintenance plan, term deposits offer good security and capital protection, with the low returns being the price paid for the security.

Looking longer term, in which you often find higher cost items more subject to inflation, decisions must be made as whether there is scope for seeking better long term potential returns, or alternatively, the stomach for higher strata levies to make up the difference.

Tim Fuller Strata Guardian E: contact@strataguardian.com P: 1300 482 736

This post appears in Strata News #534.

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This article is for reference purposes only and is not intended to be a comprehensive review of the developments in the law and practice or to cover all aspects of the subject matter. It does not constitute legal or other advice and should not be relied upon this way. Readers should take legal or other advice before applying the information contained in this publication.

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