Trust in financial services in Australia and last bank failure in Australia was in 1931…

I had written a  piece on how culture/ethics/trust is becoming one of the main talking points amidst central banks.

Philip Lowe, Governor Reserve Bank of Australia, joins in with this speech. Australia is going through its own sets of troubles with bankers found to be mis-selling financial products and services.

What I found more interesting was his mention of this bank failure in Australia:

Finance is all about trust. When a deposit is placed in a bank, we trust it will be repaid. We also trust financial institutions to invest our hard-earned savings for us. And we trust them to provide us with sound advice. Without this trust, the financial system cannot operate properly and the economy cannot prosper. As the first line of the Banking and Finance Oath says: ‘Trust is the foundation of my profession’.[1] I encourage everybody in the finance sector to read this oath regularly and to live by it.

Australia’s banks have a strong record of being worthy of the trust that is placed in them to repay deposits. The last bank failure in Australia that resulted in a loss to depositors was almost 90 years ago, back in 1931, and it was a very small bank and depositors lost only a small fraction of their deposits.

This is a positive record that few countries can match. This strength was apparent during the financial crisis a decade ago and has served Australia well. The Australian banks are strongly capitalised and have considerable liquidity buffers. On the whole, they have also managed credit risk effectively, reporting few problem loans by global standards. This means that we can have a high level of trust in the ability of Australia’s banks to repay depositors. Indeed, our strong and stable banking system is one of the Australian economy’s strengths.

It is in other areas, though, where trust has been strained. It is clear that the behaviours highlighted by the Royal Commission have dented the community’s trust in parts of our financial sector.

It is quite a record really.

This paper further explains:

Only three banks failed during the 1930s ñ two small trading banks (the Primary Producers Bank and the Federal Deposit Bank) and the Government
Savings Bank of NSW. The Government Savings Bank was brought down by political turbulence as much as the economic conditions. While the
Commonwealth Bank provided some limited support to two of these banks, it was later criticised for not taking a more active role, particularly since two of the banks were solvent when they suspended payment.

In 1930, the Primary Producers Bank of Australia accounted for less than 0.5 per cent of Australian banksí deposits. Most of its customers were farmers, and
as the prices of primary produce fell the bank suffered a steady drain on its resources. Over the 18 months prior to the bankís closure, it lost 40 per cent of its
deposits.

In April 1931, the bank sought the assistance of the Commonwealth Bank in anticipation of a run following the suspension of the Government Savings Bank.
The Commonwealth Bank provided an unsecured overdraft of £100 000 and a loan of £295 000 secured by government bonds, a fixed deposit at another bank
and the bankís premises. The Primary Producers Bank actively sought amalgamation with the other trading banks and overseas financial groups. While
the Commonwealth Bank considered arranging joint action with the trading banks to avoid closure of the Primary Producers Bank, the other banks decided against the proposal. In the wind-up of the bank depositors were not quite fully paid, losing just 1.25 per cent of the value of their deposits (Royal Commission into the Monetary and Banking Systems 1937).

Need to read more amd more about different banking systems across the world….

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.


%d bloggers like this: