Question

27.Your uncle has a big proportion of his life savings deposited in one of the Big Four Australian banks. He read in the newspaper that due to COVID-19, these banks’ profitability has declined significantly as a result of some customers not being able to service their loans and negative economic outlook. He is worried that his deposit in the bank may not be secure and is wondering whether he should withdraw all his deposit from the bank. Knowing that you have just completed this unit, he asked for your advice.
What advice will you provide to your uncle given what you have learned about financial institutions in this unit?

Answer 1

I will be advising him that he should not be taking out the money out of these banks because even if one of the client have defaulted and which has impacted the major profitability of the bank,the bank is still stable and economically sound as well, as it has enough solvency on its hands to pay back the deposits to various investors out there.

Depositors are highly safe individuals when it comes to returning back the money from the bank and these Australian banks are highly secured banks even if their profitability has declined in the recent past and these are temporary factors because of the decrease in the Asset quality due to default of some borrowers.

depositors must also be secured because the economic system of the country is designed in such a way that the government will not let these banks fail and they will be trying to help this banks to always repay the capital by providing capitalisation

failing of a bank can lead to contagion in the economy and hence these banks are not easy to fail and they are also backed by government and regulated by central banks so uncle does not need to fear about his deposits as it is highly secured.