What happens to your term deposit if your bank closes?

It’s not very likely to happen, but what happens to your term deposit if your bank fails or closes? 

The government established the Financial Claims Scheme (FCS) to protect depositors in case of failure in light of the Global Financial Crisis. This scheme guarantees deposits up to $250,000 per account holder, per authorised deposit-taking institution (ADI). This means that if your bank or credit union fails, the government will cover your deposits up to this amount.

If your bank were to close or fail, the Australian Prudential Regulation Authority (APRA) would step in to manage the situation. Here's what typically happens:

1. APRA would appoint an administrator to manage the bank's affairs.
2. The FCS would be activated by the government.
3. Depositors would be contacted with information about how to claim their funds.
4. A dedicated website and hotline would be established to assist depositors.

Most depositors can expect to receive their funds within seven calendar days of the FCS being activated. However, the exact timeline may vary depending on the situation. 

When a bank closes, it is important to think about how this affects your term deposits. These savings vehicles have unique characteristics that require careful attention during such transitions.

• The original maturity date of your term deposit becomes void when the bank fails.
• You'll generally have immediate access to your funds (principal and accrued interest) once the FCS is activated.
• Interest is typically calculated up to the date of the bank's closure, not the original maturity date.
• Early withdrawal penalties that would normally apply to term deposits are usually waived in these circumstances.

To be clear, it’s pretty unlikely that an established Australian bank would fail or go bankrupt. Plus, if they did, you'd still be protected by the FCS up to $250,000 per person, per ADI.  

If your term deposit or savings account exceeds the $250,000 FCS limit, the situation becomes more complex:

• The guaranteed portion ($250,000) would be returned through the FCS process.
• For amounts above $250,000, you would become an unsecured creditor of the failed bank.
• Recovery of the excess would depend on the bank's liquidation process and remaining assets.
• This process may take several years, and there's no guarantee you'll recover the full amount.

For this reason, many people with large savings spread their money across multiple ADIs to ensure all their funds are protected under the FCS.

While bank failures are rare in Australia, it's always a good idea to take some precautions. Make sure you keep your contact details up to date with your bank so they can reach you if needed. You may also want to maintain thorough records of your deposits and account details for your own reference. 

If your savings exceed $250,000, you could spread large deposits across different authorised deposit-taking institutions to maximise your protection under the Financial Claims Scheme. 

Also, check that your financial institution is an authorised ADI by visiting APRA's website to confirm its status. Finally, take time to read the terms and conditions of your term deposit, especially in regard to clauses that outline what happens in extraordinary circumstances, such as a bank closure.

If you're concerned about your term deposit or want more information about the Financial Claims Scheme:

• Visit the FCS website 
• Contact the Australian Prudential Regulation Authority
• Speak with a financial counsellor or advisor who can provide personalised advice
• Reach out to your bank directly to discuss your concerns.

Typically, a higher interest rate for savings products comes from a bank or ADI having less overhead – that is, physical branches populated with staff, as opposed to online-only support. There are pros and cons for either of these, so be sure to look at term deposit reviews to get the bigger picture.

In the meantime, have a look at the sorts of term deposits that are available to compare on our hub pages today.