Basel III Rules Set to Improve Term Deposit Conditions in Australia

The continued official cash rate cuts enforced by Australia’s central bank are a protective measure, meant to help people cope better with debt. However, many are arguing that such measures are discouraging people from planning ahead and saving money. A fall in interest rates dictated by the central bank means that banks will cut both interest on loans, as well as interest on saving products. Although the situation may appear as clear-cut as that, there are plenty of signs pointing toward the value that banks place on term deposits. While they might lower rates, banks will most likely remain competitive on this segment, for some of the reasons outlined below.

In mid-January 2013, the Westpac Institute Consumer Index Sentiment poll for 2013 finally turned optimistic. The index spent the largest part of 2012 ‘in the red’, with values for the main index falling below 100.0. This meant that the financially pessimistic were outnumbering the optimists. All that changed – albeit only by the slim margin of .6, up to 100.6, in the wake of the Reserve Bank of Australia’s most recent official cash rate cut, announced in December 2012. At the time, RBA officials said they had decided to further their efforts of alleviating financial pressure on the indebted population of Australia. By taking the official rate down by another .25 basis points, they lowered it to 3 per cent – the lowest it has been since September, 2009, at the height of the recession. And while mortgage owners couldn’t be happier for it, and are now awaiting their lenders to subsequently lower their own rates, term deposit holders are somewhat dismayed: the coming year will not be as financially secure for them as they had initially held out hope.

Back in September 2012, some three months before the latest cash rate cut, RBA assistant governor Guy Debelle explained that banks had no interest in penalizing holders of term deposits. Savings accounts that can be tapped into at any given time are costing banks a lot of money and are also counter-productive in the context of the Basel III rules, which are expected to come into force in 2015. These rules aim to make banks more secure by enforcing regulations for liquidities. Under the Basel III rules, Australian banks will be mandated to hold enough capital as to hold out during a month of financial stress. As such, a savings account, which can be emptied by its holder without too much prior notice, is likely to become more expensive, in an attempt from banks to encourage clients to save for the long-term. After all, it’s in the banks’ best interest to secure as much liquidity from their clients as possible – and, most importantly in the case of term deposits, for as long a time as possible.

Guy Debelle explained that at-call accounts are essentially making banks less financially secure and pleaded for term deposits as a better form of investment. Indeed, term deposit rates, are a longer-term, yet lower risk form of investment. And, as Debelle put it, the banks are not going to slash term deposit rates indiscriminately, in a banking environment in which every cent saved by a client with their bank matters. In the assistant governor’s view, The Basel III rules will only encourage competitiveness and allow prospective clients to ‘shop around’ more easily.

At the moment, it has been estimated that Australia’s income earners are saving around 12 cents for each dollar earned, which brings savings to one of the highest levels in recent times. If the RBA’s assistant governor is right, they will only come to save more, once the new rules force banks to value liquid assets more than they already do.

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