Xinja and COVID

Hi, not sure exactly where to post this so please forgive me if this isn’t the right category.
Obviously these are economically crazy times. Major companies are crumbling and laying off masses of employees. I have limited knowledge of how banks operate commercially so please correct me if I get this wrong. My guess is that banks like Xinja (who don’t yet offer loans and have very few fees) would take the money that people deposit into them and invest it in the stockmarket to make their profit.
With the stockmarket being SO volatile right now that seems disconcerting.
If the stockmarket were to crash would Xinja still be viable?
With Xinja offering Stash accounts allowing deposits up to $250k would customers with large amounts of money in a Stash account be exposed to this risk?
I understand that Xinja customers qualify for the Aus Gov Guarantee but I for one would rather not be relying on that when it comes to large sums of money.
Thanks in advance for your information.

2 Likes

Hey @Foz and welcome :_ninja_emojis_lblue_01: To put your mind at rest, Xinja is NOT investing deposits money in the stock market. Typically banks don’t do that incidentally and our risk framework would not allow us to do so!! You’re right - the best thing to do with deposits is to lend them out in the form of loans - that’s classic banking - and we don’t have lending yet. We are investing some of the money in lower return but much lower risk investments, ie: government bonds and other banks but that is all. We’re planning on launching lending mid year, so we will start to do that instead then. Also, on the $250k guarantee, in the very unlikely event of it being needed by customers of Xinja (or any other bank for that matter), it doesn’t make a difference how much you have in your account - the government will pay (up to max of $250k per customer) and would not discriminate against those with larger amounts.

4 Likes

Thanks so much for the information. It’s is really good to know and puts the mind at ease.

2 Likes

Hi, interesting post. I suspect your concerns strike a cord with many customers at this time. The Australian Government passed a law last year around February 2019 that paves the way for bank “bail-in”. More info below:

This law kicks in BEFORE a bank defaults and aims to prevent a bank collapse, so the government guarantee does not even come into effect.

Following the new legislation being passed, many banks changed their T&Cs to allow a bail in.

My question would be, is Xinja affected by this? Thanks.

1 Like

Hi @Fumbi, the short answer is no. Depositors cannot be ‘bailed-in’ and this article is misleading. The FCS does protect customers in the event of the bank failing. And prior to that, there is a huge amount an ADI has to do to protect depositors under current APRA regulation

Forgive long winded response but 2 main areas:
Bail-in is designed to provide further loss absorbing capacity to protect depositors from loss - the primary purpose of Common Equity Tier 1 capital is to provide the best protection against unforeseen losses to ensure that depositors are protected
The bail-in provisions are intended to allow for capital or debt instruments, such as hybrid instruments that larger banks issue as Additional Tier 1 or Tier 2 capital instruments, to be converted to CET1 capital under certain circumstances - i.e. a crisis. These instruments:

  • are debt-like instruments as they pay a coupon on the face value of the instrument and are generally traded on the ASX
  • terms are required to be approved by APRA prior to issuance to ensure they meet the criteria so as to qualify as AT1/T2 instruments - if an ADI does not have a sufficient level of these instruments, then they must hold more CET1 and therefore these is an incentive to issue these instruments as they are viewed as cheaper to issue than CET1
  • have had their terms amended, in line with APRA requirements, to make it clear to those buying the instruments will be bailed-in and converted to CET1 capital. As you can imagine, the pricing of these instruments has been adjusted accordingly as investors want a higher return to compensate for the risk of conversion to capital.

So bail-ins are not about depositors. In addition:

ADI Capital requirements

  • APRA imposes ‘risk-based’ capital requirements on ADIs - similar to credit rating agencies - so typically, stronger ADIs have lower capital requirements - i.e. the major banks generally need to hold less capital as a percentege of risk-weighted assets than everyone else
  • every ADI is required to publish its capital position on their website as part of the Pillar 3 capital requirements
  • these capital requirements are substantially higher than the 4.5% minimum CET1 imposed by the Basel rules
  • All ADIs are required to undertake stress tests to calibrate their capital positions - i.e. a severe but plausible event - to ensure that even under those circumstances, they are able to recover their capital position. They must hold a buffer above the minimum requirement set by APRA and the Board is accountable for maintaining adequate capital levels
  • All ADIs must also have Recovery Plans that provide its Board with a catalogue of options to recover their capital positions in a crisis. Some of these options include selling loan books or merging with a stronger counterparty - see BankWest and CBA merger during the GFC as an example
  • So above and beyond the BAU capital requirements outlined above, a crisis would need to consume capital beyond these levels and beyond anything an ADI itself can deal with through enacting its Recovery Plan. In those circumstances, APRA would be expected to appoint a Statutory Manager with the express intent of protecting depositors

FCS

The FCS provides identical protection to a depositor of ANY ADI - be it CBA or Xinja or any credit union.

  • Each depositor is covered for losses of up to $250k by the government
  • As noted above, even if the losses were greater than expected and a liquidator could not pay all deposits from the value of an ADIs assets, depositors of the ADI would be paid up to $250k.
  • Any holding above $250k would join the queue in a liquidation - noting that depositors have preference to other creditors

So no - depositors’ money would NOT be used in the way implied in this article - by Xinja or any ADI. APRA would not allow that.

Sorry to be slow in responding and do such a long response! But the detail is important, so we decided to pull it together for you. Hope that helps! :_ninja_emojis_lblue_01:

3 Likes

Great questions folks and great answers Team Xinja. Thanks all.

Thank you for detailed response! Very clear. Much appreciated. Glad we all know now our funds are are safe with Xinja!