When a bank is not a bank

The collapse of Banksia Financial Group has left thousands of farmers and other Victorians in regional areas facing a nervous wait to see what, if any, of their savings will be returned. Unfortunately the collapse is not an isolated incident and follows several others in recent years including but not limited to Westpoint and Australian Capital Reserve.

Like several other similar ‘non-bank lenders’ in recent years Banksia offered investors high rates of interest on its debentures which it then on lent as mortgages or commercial loans. The high interest rates being offered attracted investors looking to generate a little more form their savings than what was on offer from the major banks. Unlike the major banks however, as Banksia did not hold a banking license, and its debentures were not covered by the government deposit guarantee.

One of the biggest lessons we should take from the recent collapse of Banksia is the huge difference between it and heavily regulated and highly capitalised banks. Banks are monitored by a regulator whose job it is to protect our deposits. It does this by essentially ensuring banks hold enough funds to protect against bad loans, by monitoring policies and the quality of the loans the banks make.

By ensuring they hold a minimum amount of capital to protect against bad loans banks can protect depositors against losses made when a borrower defaults on their repayments. Most banks hold around $10 of capital for every $100 they lend. Banksia has less than $3.60 for every $100 of loans so when loans started to go bad it did not take very long for depositor’s money to be at risk.

So be careful when choosing where to invest your funds especially and do not be dazzled by the allure of ‘too good to be true’ interest rates as this may mean you are depositing money with a non-regulated institution. Just because they are allowed to raise money does not necessarily make them safe.

 

Knight Financial Advisors Pty Ltd is a Corporate Authorised Representative of Sentry Wealth Management Pty Ltd (AFSL 227 748) ABN 77 103 642 888. The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.