Stream Two: Support smaller lenders to compete with the big banks

Confirm the Financial Claims Scheme as a permanent feature of our financial system

The Gillard Government will confirm the Financial Claims Scheme as a permanent feature of our financial system. Deposits covered under the Financial Claims Scheme are a critical source of funding for our regional banks, credit unions and building societies, making this an important measure to support the capacity of these smaller lenders to access funds for cheaper loans to compete with the big banks.

The Financial Claims Scheme was developed over the period leading up to the global financial crisis by the Council of Financial Regulators, whose members include the Governor of the Reserve Bank, the Secretary to the Treasury, and the Chairmen of both APRA and ASIC.

The decision to introduce the Financial Claims Scheme was taken well before the crisis, but was accelerated to secure confidence in the Australian financial system following the collapse of Lehman Brothers.

Australia's banks are well capitalised and have benefited from years of tough supervision by our world-class financial regulators. Our banks are soundly managed by international standards, having developed strong institutional cultures of responsible lending and risk management.

But Australia was not immune from the profound loss of confidence that occurred around the world during the depths of the global financial crisis, when depositors in Europe and the United States became concerned about the safety of their deposits.

To prevent a similar situation occurring in Australia, the Government quickly and decisively introduced the Financial Claims Scheme to provide certainty to Australian depositors through a free guarantee for their deposits of up to $1 million.

The Government has been working with the Council of Financial Regulators to review the current $1 million cap, up to which coverage is currently free, to determine an appropriate level at which the cap will be set from October 2011.