Who should take responsibility for our savings?

Ever since the financial crisis in 2008, I have been troubled by elements of the banking industry and the ongoing debates around 'too big to fail' and moral hazard. The cost of the bailout continues to hang over the economy and impact broader society.

"Depositors would be better informed and can make their decision on where to place their funds – at their own risk."
Tareq Muhmood, CEO Korea & Managing Director Global Subsidiaries, ANZ

What is a concern is that inevitably taxpayers will end up bailing out banks and their depositors when the next crisis comes along.

The alternative approach is we should let banks fail. This unfortunately means the depositors will need to have their money at risk.

Today, whether it is via explicit deposit guarantee schemes or the implicit moral hazard of banks being too big to fail, depositors – big and small – are protected to a degree from a failure.

To help make this risk to depositors more transparent, what if, instead of investing in new regulations and monitoring, we invested in a better assessment and scoring systems for banks?

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Banks with low loan-to-deposit ratios, do not engage in complex on-balance sheet derivative transactions and have a track record of stability of leadership, for example, would score an ‘A’.

Conversely, those with weaker ratios, more complex businesses, high leadership turnover, would be scored a ‘D’ or ‘E’.

Such a scheme already operates in some form in some jurisdictions, notably Cyprus and New Zealand – although in New Zealand the major banks are subsidiaries of Australian banks and hence operate under an Australian ‘umbrella’.

Just as with restaurant hygiene scores displayed in the windows of diners in places like Singapore and New York, depositors would be better informed and can make their decision on where to place their funds – at their own risk.

Banks operating with more risks would expect to pay more for their deposits than those with less.

Moody's, S&P, Fitch and others already provide ratings services. These would need to evolve to cater for the need of depositors, as opposed to bond or shareholders. There is of course regulatory complications of agencies themselves being restricted on providing assessments for a retail market.

The basis for this ‘lender-beware’ argument was when I heard about one UK University whose treasurer placed £10 million with an Icelandic Bank operating in the UK.  They chose this small Icelandic bank over Barclays or HSBC because of the ‘rate’.  When the Icelandic Bank ‘froze’ during the financial crises, the University was bailed out and taxpayers paid the bill.

In such cases, shouldn’t the university carry the burden for chasing a higher price irrespective of the risk?

This is a problem of both moral hazard and financial literacy – the hazard is we are not liable for the risks we take; the literacy issue the disconnect between the relationship of risk and reward.


Since 2008 regulations have helped ensure banks hold sufficient capital, recognise risk, protect depositors and so on.  Most of these regulations come with good intentions, although it is unintended consequences that cause concern.

Books have been written on how to make Finance safer, and Martin Wolf’s article in the FT provides an excellent summary of Lord Mervyn King’s (former governor of the Bank of England) book which offers alternative ways on how they system can still work with some safe-guards and ‘bailout’ mechanisms.

Part of this hinges on leverage – higher leverage equals higher risk. Having a capital adequacy of 8 to 10 per cent is considered a norm. But leverage in the system is necessary, without it we close off much future investment, whether in a house or a major piece of infrastructure – and that is where depositors come in and take the risk.

But depositors do need to understand the risk to make that decision. Whilst we might help protect the depositors (and tax payer) from today’s dangers, it is always harder to see what is around the corner.

Today’s regulations are to protect us against past mistakes but in all likelihood they might not protect against tomorrow’s dangers.

To come at the problem from a different perspective, to remind depositors they are lending money to an institution and the return depends on risk, would be valuable. It wouldn’t of course be easy and it comes back to financial literacy.

Rather than focussing exclusively on making banks safer, which is one aim of global regulators, we should also pay attention to the work they are doing on so-called ‘living wills’ – resolution and recovery schemes for when banks do get into trouble.

Much-greater transparency around this project should encourage better risk assessment by depositors which would in turn push more institutions to make themselves safer.

I recognise my thought process may sound too simplistic and this issue has a phenomenal degree of complexity.

But while a bank failure carries significant systematic risks, complexity and pain, the pain of bailouts and the unintended consequences of regulations is much worse.

Tareq Muhmood is CEO Korea & Managing Director Global Subsidiaries at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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