Changes to Term Deposits

Why does my bank now require me to give notice if I withdraw from my term deposit early?

Many of us have money set aside for no immediate purpose so we have often deposited the money in a term deposit offered by our bank. Banks traditionally offer term deposits for periods ranging from one month to five years. The interest rate the bank pays is set at the time we make the deposit.

However, from time to time, a situation may arise where we need to access money that is in a term deposit.
Generally, accessing a term deposit early has not been too difficult but our bank may charge a fee and/or adjust the interest payable on our term deposit to reflect the early withdrawal.

However, from 1 January 2015, things changed. In addition to charging a fee and/or adjusting interest on the early withdrawal from a term deposit, banks are now requiring that a depositor gives 31 days’ notice if they intend to withdraw all or part of a term deposit early.

Why is notice now required?

Authorised deposit-taking institutions (i.e. banks) are governed by complex legislation.

A recent change, referred to as the “Basel III Liquidity Reforms”, has introduced new minimum liquidity requirements that must be met by our banks. The liquidity requirements are covered by a Liquidity Coverage Ratio (LCR) that took effect from 1 January 2015.

The LCR is designed to ensure that banking institutions have sufficient funds available to survive an “acute stress scenario” (e.g. a run on the bank) that lasts for one month. To meet this requirement, banks need to maintain a stock of “high quality liquid assets” to cover “total net cash outflows” over the next 30 days.

It goes without saying that the higher the total net cash outflows a bank has, the more money that needs to be held in these high quality liquid assets. The interest a bank might earn on these high quality liquid assets may not be as high as may be earned on other investments the bank may make, therefore banks will have an interest in minimising their “total net cash outflows”, and therefore the amount that needs to be held in these high quality liquid assets.

What does this have to do with me as a term deposit holder?

Where a bank issues term deposits and requires deposit holders to give more than 30 days’ notice of intention to withdraw our money early (i.e. before the expiry of the term deposit), the value of money deposited in those term deposits is not counted as part of the banks “total net cash outflows”. In other words, by imposing a 31 day notice period for the early withdrawal of term deposits, our bank is able to reduce the value of high quality liquid assets they need to hold under the Basel III Liquidity Reforms.

A recent review of the term deposits offered by the major Australian banks has indicated that they are all requiring 31 days’ notice in respect of the early withdrawal of term deposits. One bank did provide an exemption the 31 day notice period where early withdrawal was required as a result of financial hardship.

However, to satisfy this exemption, the bank concerned would assess the depositor’s circumstances to ensure financial hardship existed.

We strongly suggest speaking with your financial adviser about accessing money from your term deposit early.

Realise your Dream 

The Realise Your Dream blogs are written by Peter Kelly and Mark Teale. More information about the authors can be found here