Depositor Protection and Bank Liquidity Regulation: Distortions Affecting Superannuation

• Author: Kevin Davis,Rodney Maddock
• DOI: http://doi.org/10.1111/1467-8462.12321
• Published date: 01 June 2019
• Date: 01 June 2019

Depositor Protection and Bank Liquidity Regulation:

Distortions Affecting Superannuation

Kevin Davis and Rodney Maddock

*

Abstract

This article explains why short-term bank

deposits, made on behalf of members by

institutional superannuation funds, receive a

substantially lower interest rate than deposits

made directly by individuals and self-managed

super funds. We estimate the potential negative

effect on the ultimate retirement savings of

those members. We show how extending the

Financial Claims Scheme to provide coverage

to such deposits on a ‘look through’ basis

would remove that inequity and should, in

principle, remove the rationale for the payment

of lower interest rates. We consider the

political arguments against extending the

scheme and argue that these are of limited

merit.

1. Introduction

For several years now, short-term deposits in

Australian banks made by institutional super-

annuation funds on behalf of their members get

paid interest rates which are between 40 to 80

basis points lower than those on deposits from

individuals or self-managed super funds

(SMSFs). The reason for this can be found in

liquidity regulation, in the form of the

Liquidity Coverage Ratio, to which the large

banks have been subject since January 2015.

We explain how this anomalous effect arises

and demonstrate how it could be easily

removed without undermining the operation

of the Liquidity Coverage Ratio. This involves

extending the depositor protection provided by

the Financial Claims Scheme to deposits made

on behalf of members on a ‘look through’

basis. That would remove two inequities

induced by regulation. One is the differential

in deposit rates paid to different types of super

savings, and consequent deleterious effects on

the ultimate retirement income of members of

institutional super funds. The second is to

provide such members with equivalent protec-

tion available to others against loss of savings

from a bank failure.

The following section outlines how the

Liquidity Coverage Ratio regulation leads to

this deposit rate distortion and demonstrates

why the gap in deposit rates paid is as large as it

is. Section 3 examines some of the consequen-

ces arising. One is the size of the likely effect

on retirement incomes. A second is how

innovations in deposit product design and

operating arrangements of super funds could, at

a cost, avoid the distortion. A third is potential

incentives for individuals to shift from institu-

tional super funds to SMSFs to avoid the

interest rate penalty. In Section 4, the

* Davis: Department of Finance, University of Melbourne,

Victoria 3010 Australia; and (at the time of writing)

Australian Centre for Financial Studies, Monash Univer-

sity, Victoria 3000 Australia; Maddock: Australian Centre

for Financial Studies, Monash University, Victoria 3000

Australia; and Victoria University, Victoria 3011

Australia. Corresponding author: Davis, email

<Kevin.davis@unimelb.edu.au>. This article is based

on a larger study with the same title prepared for ANZ

Bank by the Australian Centre for Financial Studies (ACFS

2018).

The Australian Economic Review, vol. XX, no. XX, pp. 1–9 DOI: 10.1111/1467-8462.12321

°

C2019 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research,

Faculty of Business and Economics

Published by John Wiley & Sons Australia, Ltd

The Australian Economic Review, vol. 52, no. 2, pp. 149–157