Depositor Protection and Bank Liquidity Regulation: Distortions Affecting Superannuation

Abstract

This article explains why short-term bank deposits, made on behalf of members by institutional superannuation funds, receive a substantially lower interest rate than deposits made directly by individuals and self-managed super funds. We estimate the potential negative effect on the ultimate retirement savings of those members. We show how extending the Financial Claims Scheme to provide coverage to such deposits on a ‘look through’ basis would remove that inequity and should, in principle, remove the rationale for the payment of lower interest rates. We consider the political arguments against extending the scheme and argue that these are of limited merit.