How do I get my money back if my bank closes?

The recent news of Silicon Valley Bank’s (SVB) collapse has made many Aussies nervous about their bank's stability. 

While we've seen some smaller neobanks go bust in recent years – namely Volt and Xinja – the likelihood of a major Australian bank going under is slim.

Even the Reserve Bank of Australia has said our Aussie banks are in a healthy state, with many reporting significant profits in the last year. 

But on the off chance you find yourself in a situation where your bank does close, we’ve answered some key questions below.

To understand the collapse of a bank, you first need to know how banks make money.

It’s easy to forget, but a bank is a business set out to make a profit. It earns most of its money by lending out money–through products like home loans and car loans–at a higher interest rate than the interest rates it pays on deposits like savings accounts and term deposits, and other funding sources. 

The gap between the bank’s interest earnings and interest costs is called the net interest margin or NIM. This measures the bank's profitability amid the revenue it makes.

A bank also uses the money in its reserves to invest in different types of assets to increase its profits. 

So for a bank to go bust, a mass of people would need to either default on their loans or pull their deposited money out of the bank in droves. When this happens, a bank no longer has the funds to offer loans, invest in new assets and pay interest on deposits.

Again, this is extraordinarily unlikely to happen.

When the Australian Prudential Regulation Authority (APRA) grants an Authority Deposit-Taking Institution (ADI) licence, one of the factors it takes into consideration is if a bank can continue running even in difficult financial times.

Notably, the last time a bank went bust in Australia in the above fashion was in 1977. Customers were repaid without any losses thanks to the takeover from the State Government Insurance Office.

In the case of Volt and Xinja, these businesses didn’t collapse. Instead, they decided to stop being traditional financial institutions and returned their ADI licence (the right to be a deposit-taking bank) when it became financially unsustainable to continue running.  

But if a bank did go under, your primary concern would obviously be getting your money back, so let’s take a closer look at that.

On the slim chance your bank suddenly closes down, the government will ensure you get your money back – up to a certain amount.

Specifically, the Australian government guarantees up to $250,000 refunded for deposits registered with ADIs under the Financial Claims Scheme (FCS). 

Remember that this $250,000 guarantee applies to all your collective accounts under an ADI licence, not separate deposits. That means if you have money in two different banks under the same ADI, it’s treated as one institution under the FCS.

Note: Since establishing the FCS in 2008, no claims have been made. So it remains to be seen how long the process will take or how the deposits will be returned to customers.

When Volt and Xinja closed they gave customers plenty of time to withdraw their money and find a new bank, so there was no need for FCS to be used.

Sadly, if your bank goes bust, your home loan doesn’t magically disappear (but we can fantasise).

It’s likely that your mortgage would be sold to another lender and you’d make repayments to them instead.

Keep in mind that if your mortgage is sold to a new financial institution, there is a chance that your interest rate might increase or decrease depending on the new lender’s rates.

Again the likelihood of something like this happening is low, so there’s no need to panic about what-ifs right now. 

Yes, the collapse of Silicon Valley Bank in the US made global news, but Australia has one of the most well-regulated financial systems in the world and a similar event is unlikely. 

Want to find out more about bank accounts and savings accounts? Check out our savings and banking guides to get learning. Our experts have also reviewed and awarded the best savings accounts on the market, so check them out!