What happens if a bank collapses?

It’s been a tough few weeks for the banking industry, with US lenders Silicon Valley Bank and Signature Bank collapsing and Swiss giant Credit Suisse forced to accept a takeover offer.

As a result, you might be wondering what is the likelihood of an Australian bank collapsing? And what would happen if a bank did collapse?

On the first question, it’s fair to say the chances of a local bank collapsing are highly unlikely.

That’s because, after a string of overseas banks failed in 2007-08 during the Global Financial Crisis, the global community, including Australia, implemented a series of measures to make the banking system more resilient.

These measures had two aims – to reduce the chances that individual banks would fail and to reduce the chances that the collapse of one bank would lead to the collapse of another.

Speaking last month – before these recent problems began – John Lonsdale, the chair of Australia’s banking regulator, APRA, told the Senate Economics Legislation Committee that people could be confident in the “strength and stability” of our system.

“There has been much work undertaken over recent years to strengthen and build resilience in the system and prepare the industry for any potential downturn,” he said.

“Prior prudential measures aimed at strengthening banks’ balance sheets and their lending standards mean that the system is well placed to absorb a more challenging period while continuing to meet the credit needs of households and businesses. Capital buffers are well above minimum requirements and APRA’s latest stress testing indicates that the banking sector will remain resilient.”

What would happen if a bank did collapse?

While the odds of a local bank failing are remote, of course it remains theoretically possible.

If that did happen, home loan customers wouldn’t lose any money – because they would be borrowing from, rather than lending to, the failed institution.

That said, their mortgage debts wouldn’t be magically wiped out. Instead, they would have to make their home loan repayments to the new owner (if the failed bank was taken over by a rival) or the liquidator (if the failed bank wasn’t rescued).

The $250k government guarantee

After the Global Financial Crisis, the federal government introduced the Financial Claims Scheme (FCS), which is more commonly known as the ‘government guarantee’.

The FCS “provides protection to deposit-holders with Australian incorporated banks, building societies and credit unions … in the unlikely event that one of these financial institutions fails”.

Under the FCS, the government guarantees to reimburse deposit-holders for deposits of up to $250,000 per account holder per institution.

Keep exploring