Is money in the bank really as safe as houses?

If you have your money in the bank in a cash or term deposit account, the government has you covered for $250,000 per account per bank. But what if you’re the lucky owner of more than $250,000?

All you need to do is find a second authorised deposit-taking institution and a second guarantee will apply under the federal government’s Financial Claims Scheme.

That scheme started in 2012. Before then, the guarantee was $1 million, which proves that not everything goes up.

But the predecessor to the Financial Claims Scheme only started in 2008. Before then, the fallout from bank collapses (and falsely rumoured bank collapses) was handled by the Reserve Bank and state governments, and in some cases banks simply collapsed.

The Financial Claims Scheme is there for when things go really wrong, but so far it has been among the long-term unemployed. And let’s hope it stays that way.

This does not mean banks don’t get into trouble. Recently, two banks – Volt and Xinja – decided to give back their banking licences.

You may never have heard of those two banks. They were so-called neobanks. Neobanks offer apps, software and other technologies to streamline mobile and online banking. ‘Neo’ means ‘new’. Neobanks don’t have branches. They’re online and that’s it.

Volt collapsed because it could not entice enough people with enough money to deposit with it, so it could not write the loans it committed to making. As a result, it gave up.

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Volt is returning all the deposits of its 5730 customers, which totalled $107 million. A remaining 441 low-balance accounts were transferred to another bank as per regulation. Any financial losses at Volt will not cost the government, i.e. the taxpayers, a cent.

Xinja failed, in part, because it started taking deposits before it made loans. That meant it had to pay interest to customers before it was generating income. Volt, on the other hand, made loans but then couldn’t find the money to lend out.

Fortunately, neither bank’s failure has led to any claims on the federal government’s Financial Claims Scheme.

There used to be five neobanks, now there is just one – Judo Bank, which listed on the stock exchange in November last year at $2.26 a share, but which has recently been trading as low as $1.20.

Read: How Big Four get away with offering ‘paltry’ term deposit rates

Volt and Xinja are out of the game, the two other neobanks, 86 400 (what a catchy name!) and Up were bought out by two ‘old’ banks, the National Australia Bank and the Bendigo and Adelaide Bank, which were after the proprietary technology used by the start-ups.

As mentioned, Judo Bank is still going and offers term deposit rates of 3.65 per cent annually and 4 per cent for two years. Those rates still beat the old banks, but would your money be safe?

On its website, Judo Bank answers that question by pointing out that up to $250,000 of your money is covered by the Financial Claims Scheme. So, yes, your money is safe.

Banking regulator APRA agrees but does seem a little worried, though. Apparently, APRA has received a dozen or so new neobank licence applications. While it called one of the neobank collapses a “successful failure” (because all deposits were returned and the Financial Claims Scheme didn’t have to part with any money), APRA’s deputy chairman John Lonsdale went on the record to say: “We are going to make a few changes to how we think about [bank] licensing.”

Included in those “changes” will be a “robust resolution plan”, that is, a plan for the safe return of deposits to minimise any call on the government’s deposit guarantee.

You are not the only one who wants to make sure your money is safe. The government wants to make sure its money is safe, too.

Paul Versteege is policy manager at the Combined Pensioners and Superannuants Association. This article is republished with permission.

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