Earlier this week the ABC posted an interesting and lengthy article headlined “Coronavirus heightens fears bank deposits could be wiped out under ‘ambiguous’ laws” . The subject matter of the article was the frightening possibility that in the event of a financial crisis, the bank deposits of bank customers might be wiped out.

By “wiped out” the article was referring to a situation where a bank in financial difficulty is permitted to convert customer deposits into shares in the bank. In other words your ‘bank deposit’ might become little more than a share in a bank in severe financial difficulty. Not a very appealing prospect to most.

Certainly once the bank deposit is converted into shares the customer may be able to sell the shares at whatever the going rate for the bank shares might be (and that might not be much) but they will not be able to “withdraw” their deposits as cash….. as they probably would prefer.

The rest of the article explained in detail the reasons some fear a “bail-in” could happen and the arguments why the chance of a “bail-in” is very small. Make yourself a strong cup of tea as it is quite technical and dry but does involve a colourful cast of characters including Senator Malcolm Roberts of One Nation and the Citizens Electoral Council.

Some Glass Pyramid observations on the issue of bank bail-ins

Firstly, the Glass Pyramid recommends that we stop using the expression “bank deposit” as it is misleading. The word “deposit” implies to most people that the bank is holding something deposited by the customer and therefore the customer should be entitled to get the thing they deposited back when they want it.

Unfortunately, this is not the case. A bank customer is the proud owner of what is nothing more than an unsecured loan/investment in the bank. And like all unsecured investments the owner of an unsecured bank deposit is right at the bottom of the pecking order when it comes to recovering value if the bank gets into financial difficulty.

If a more appropriate term was used… say “unsecured punt on the bank” rather the “bank deposit” no one would be surprised if they lost their unsecured punt when the bank was mismanaged and was unable to pay a return on the punt or even the punt itself.

The whole idea that an “unsecured punt” on a bank should be risk free and guaranteed is even more bizarre when most people understand that the business model of the bank involves using unsecured investments (“deposits”) from customers as a float for an elaborate shell game / fraud where the bank creates liabilities (deposits) and assets (loan contracts) out of thin air and crosses its fingers that no more than a fraction of the customers it has promised can withdraw their ‘deposits’ at call will actually do so.

You cannot get much more dodgy than promising customers their investments can be returned at any time and then immediately dealing with those investments in a way which makes returning any more than a fraction of them impossible…. but folks that is just how private banking works. Jimmy Stewart explained the scam in his wonderful folksy way.

That people expect these unsecured bank investments to be guaranteed by the taxpayer is simply bizarre.

So what is the solution?

The solution is extremely simple. Allow the general public to open and operate “MyRBA” deposit accounts at the RBA. Deposit accounts at the RBA are inherently risk free and require no guarantee. Anyone who wants to save without any risk of bank failure will simply use their MyRBA account for that portion of their savings that they wish to be risk free.

Deposits in a MyRBA account will be as safe as saving $100 bills in the freezer or burying a bag coins under the cabbages, but just a lot more convenient. If you wish to transfer some of your risk free MyRBA balance to someone else you will not need to deliver a brown paper bag full of notes, you can just press a few buttons on the MyRBA app and make the transfer.

And the good news is MyRBA accounts already exist as the banks have been allowed to operate them for decades. The bank MyRBA account just has a fancier name “Exchange Settlement Account” though many people call them “Reserve Accounts”.

There is no need to worry about bank “Bail-Ins” when it comes to the contents of your MyRBA account as the Reserve Bank of Australia can never get into financial difficulty. An important reason is that the Reserve Bank of Australia does not make loans and so can never run into the problem of loans going bad, but an even better reason is the Reserve Bank of Australia can make money any time it needs to with a just a few accounting entries. No private bank can do that.

But do we get paid interest on our super safe MyRBA account ?

Nope.

If you want a return on your savings you need to take some risk and that means you will need to transfer some of your MyRBA account balance to someone who has a bright idea on how to use your money to produce a return.

This does not mean you need to be taking a lot of risk as there are plenty of boring investments that are quite safe and offer modest returns. Buying a bond issued by a company that lends conservatively for first mortgages on family homes will produce a modest return and for relatively little risk.

Buying shares in “blue chip” companies is another way you can obtain a return for relatively little risk.

However, investing money to a “Pay Day” loan shop who advances small amounts with little security to desperate people may produce a higher return but there is a much higher chance that you may lose your investment if too many of those desperate folk do a runner and don’t pay back their loans. Buying shares in start up companies is another higher risk option that may produce higher returns.

You might even decide to make an unsecured at call investment in a private bank and take a punt that they know how to manage their loan book and hope that the rest of your fellow punters don’t suddenly panic one day and cause a “run” on the bank and its sudden closure. When that happens the meaning of “unsecured investment” will become crystal clear ….unless of course Jimmy Stewart is around to calm the herd.

Summary

Senator Malcolm Roberts and the folk at the Citizens Electoral Council would be better off spending less time trying to prop up the fundamentally broken concept of a public guarantee of “unsecured investments” in private banks and fretting about the possibility of a “bank bail-in” and instead demand that the Reserve Bank of Australia extend access to risk free deposit accounts at the RBA to all Australians who want them.

After all why should the private banks have access to risk free accounts at the RBA but not the general public.

Even more importantly, allowing all Australian access to risk free deposit accounts at the RBA means a very clear distinction can be drawn between convenient risk free saving at the RBA and the risk involved in investment in the economy where you can choose whether you want low risk and low reward or are willing to chance your arm for higher returns.