Academic journal article Agenda: A Journal of Policy Analysis and Reform

The Curtin-Chifley Origins of the Australian Bank Deposit Guarantee

Academic journal article Agenda: A Journal of Policy Analysis and Reform

The Curtin-Chifley Origins of the Australian Bank Deposit Guarantee

Article excerpt

In 2008, the Australian government announced it would freely guarantee all retail and wholesale deposits in Australian banks, subsidiaries of foreign-owned banks, credit unions and building societies. Until the global financial crisis, the Australian government, the Reserve Bank of Australia (RBA), and academics and commentators had repeatedly denied that any deposit guarantee existed (Edwards and Valentine 1998; Mitchell 2006; Quiggin 2002). At best what guarantee existed was an implicit guarantee; an assumption that the government would, in the case of a bank failure, step in to guarantee deposit liabilities ex post (Gray 2004). Regardless of that repeated denial, there had been a long-standing belief held by the public that their bank deposits were guaranteed by the Australian government. A 2006 survey by the RBA suggested that 60 per cent of Australians believed the Commonwealth government either directly guaranteed deposits or, if a bank failed, would ensure they received their money in whole or in part (Reserve Bank of Australia 2006). This paper addresses the origin of that public perception, and raises questions about the status of depositor protection between 1945 and 2008.

In 1945, the Curtin government introduced legislation to regulate the banking sector and formalise the central banking functions of the Commonwealth Bank. Section 13 of An Act to regulate Banking, to make provision for the Protection of the Currency and of the Public Credit of the Commonwealth and for other purposes 1945 (hereafter 1945 Banking Act) introduced a mechanism for the Commonwealth Bank to take over banks that could not meet their liabilities. This provision was taken by the Curtin government to be an explicit guarantee of depositors' funds. The government informed parliament, the public and, crucially, the Commonwealth Bank itself that this provision was intended to be a deposit guarantee. Furthermore, the language of the provisions remained relatively unchanged throughout many rounds of regulatory reform over the next seven decades.

This is not the first time it has been suggested that the 1945 Banking Act was understood to offer Australian depositors a full guarantee of their deposits. In a brief appendix to a paper outlining the history of prudential regulation in Australia, Hogan and Sharpe (1990) note that the Chifley government seemed to believe it had instituted a deposit guarantee scheme. Their evidence for this claim is suggestive, rather than definitive. Thomson and Abbott (2000) refer to documents in archives of the RBA that outline negotiations concerning the shape of the deposit guarantee but do not consider the political and regulatory significance of those documents.

Otherwise, histories of financial regulation in Australia assume that the 1945 Banking Act was not much interested in prudential and depositor protection issues. The received wisdom is summed up by an Australian Prudential Regulatory Authority Paper which states that 'the RBA did not guarantee the repayment of deposits. Instead the [Banking] Act conferred a number of powers on the RBA to ensure depositor protection' (Goldsworthy, Lewis and Shuetrim 2000: 3). The prudential aspects of the Banking Act have been subject to little scrutiny by economic historians. For example, in his history of the Commonwealth Bank, Giblin (1951) does not look at the relevant provisions of the Banking Act. Schedvin (1992: 68) notes the mechanism for Commonwealth Bank takeovers, but does not discuss it in detail, merely commenting that the power was 'inspired by the ghost of the 1890s banking crisis'.

This paper brings to bear Lyons and Chifley government records and Commonwealth Bank archives on the origins of the deposit guarantee and how it was understood by the parliament, the Chifley government and the central bank. The paper begins by detailing the situation which prevailed before the 1945 Banking Act, and how governments reacted to banking failures in the depressions of the 1890s and 1930s. …

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