Exam 1: Why Are Financial Institutions Special

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The main cause of the global financial crisis (GFC) was the sub-prime crisis in the US in the late 2000s, during which we witnessed the failure of many US FIs. Afterwards, the financial crisis in the US became a global crisis of confidence. The result was a worldwide breakdown in credit markets, as well as an enhanced level of equity market volatility and a critical crisis of confidence that disrupted global financial markets from 2007 to 2012 and possibly beyond. At the time of writing, confidence in the global financial markets continues to decline with the sovereign debt crisis in Europe.
Individual FI failures may create doubts in savers' minds regarding the stability and solvency of FIs in general, and cause panics and even runs on sound institutions. Indeed, this possibility provided the reasoning in 2008 for the introduction of the Australian government's deposit guarantee schemes-the financial claims scheme (FCS) and the guarantee scheme for large deposits (Guarantee Scheme). The FCS initially guaranteed deposits up to $1 million, although this was reduced to $250 000 on 1 February 2012. The Guarantee Scheme was temporary only and was closed in March 2010. At the time, the government was more concerned about the possibility of contagious runs rather than bank failures. Its objective was to instil confidence in the Australian banking system, both locally and globally, at a time of global uncertainty. This was a radical move and was the first time the government had provided explicit guarantees of all Australian deposits up to $1 million.