Australian prudential rules require a bank to assume that a proportion of its at-call deposits would be withdrawn during a 30-day stress period, and to hold liquid assets against that assumption. A term deposit locked beyond 30 days with a real break penalty is excluded from that calculation entirely. The regulator also scores deposits for withdrawal risk, and online accounts, rate-driven balances, balances above the guarantee limit and customers with no other relationship all score against the bank.
A savings account and a term deposit are, to the customer, two ways of lending money to a bank. To the bank they are different products in a way the customer never sees, because a regulator has assigned them different prices. Understanding that pricing explains most of what looks arbitrary about deposit rates.
The rule that does the work
Australian banks operate under APRA's Prudential Standard APS 210 Liquidity, made under the Banking Act and current in its present form since 1 July 2025. Among other things it requires a bank to hold enough high-quality liquid assets to survive a severe 30-day stress scenario, with a minimum coverage ratio of 100 per cent.
The scenario is not left to the bank's judgment. The standard specifies how much of each kind of funding must be assumed to leave.
For retail deposits, meaning deposits placed by a natural person, the assumed outflows over the 30 days are:
- stable deposits, 5 per cent
- less stable retail deposits, 10 per cent
- higher run-off less stable retail deposits, 25 per cent
A stable deposit is one fully covered by the government guarantee where the depositor either has other established relationships with the bank that make withdrawal highly unlikely, or holds the money in a transactional account such as one receiving a salary. Everything else is less stable.
Every dollar of assumed outflow has to be matched by liquid assets the bank holds instead of lending. That is a direct, quantified cost, and it varies by deposit type.
The scorecard, and what it penalises
APS 210 does not stop at two categories. It sets out which features make a deposit more likely to be withdrawn under stress, and assigns points:
| Feature | Points |
|---|---|
| Balance above the government guarantee limit | 2 |
| The deposit is an online account | 2 |
| Absence of an established customer relationship | 1 |
| The deposit is heavily rate-driven | 1 |
A total score of 0 to 2 gives a 10 per cent assumed run-off. A score of 3 or more gives 25 per cent.
Read that table as a description of a customer and it describes a particular one: somebody who opened an online account with a bank they do not otherwise deal with, because the rate was good, and put more than the guarantee limit in it. That customer scores six. The bank must assume a quarter of that money leaves within a month.
The standard is explicit that these are the deposits considered more likely to be withdrawn: high-value deposits above the guarantee limit, deposits from customers without an established relationship, deposits where the internet is integral to the account's design, marketing or usage, and deposits with promotional interest rates, which it describes as heavily rate-driven.
Why a term deposit changes the arithmetic
Here is the provision that explains the whole rate difference.
Outflows on fixed-term deposits with a residual maturity or withdrawal notice period greater than 30 days are excluded from the calculation entirely - provided the depositor has no legal right to withdraw within the 30-day horizon, or early withdrawal triggers a penalty materially greater than the loss of interest.
Not reduced. Excluded. A term deposit sitting beyond the 30-day window contributes nothing to the assumed outflow, so it obliges the bank to hold no liquid assets against it at all.
The standard has teeth on that condition, too. If a bank permits a depositor to break the term anyway despite a no-withdrawal clause, the entire category of those funds must be reclassified as demand deposits, with the run-off assumptions that follow. There is a carve-out for a documented hardship policy. Otherwise, a bank that is casually generous about early withdrawals loses the regulatory benefit across the whole book, not just on the one account.
That is why a break penalty on a term deposit is more than a commercial term. It is the condition on which the deposit qualifies as the funding the bank was paying for.
The one-year hurdle behind it
A second requirement, covering stable funding over a one-year horizon rather than 30 days, creates another step.
Funding is weighted by how reliably it is expected to stay. Term deposits with an effective residual maturity of one year or more count at 100 per cent. Stable demand and term deposits from retail and small business customers with less than a year to run count at 95 per cent, and less stable ones at 90 per cent. Wholesale funding under six months from financial institutions counts at zero.
Where a deposit has a notice period, the bank must assume the earliest date the money could be redeemed. Optionality always counts against the bank.
What the guarantee actually covers
The guarantee is the Financial Claims Scheme, and its limit is not a bank's policy. It is set in the Banking Regulation 2016: for the purposes of the Banking Act, the prescribed limit for a protected account or accounts held by an account holder with a particular declared institution is $250,000.
The regulation also lists which accounts are protected. They include savings accounts, term deposit accounts, transaction, cheque, current and call accounts, debit card accounts, farm management deposit accounts, retirement savings accounts, pensioner deeming accounts, trustee accounts, and mortgage offset accounts that are separate deposit accounts.
It lists what is not protected, and the exclusions matter more than the inclusions. Accounts kept at a foreign branch of an Australian institution are not covered. Credit balances on credit cards or other loans are not covered. Purchased payment and pre-paid card facilities are not covered.
The regulator adds one distinction that catches people out: a mortgage account with a redraw facility that is not a separate deposit account is not covered, and neither are additional repayments made against a loan. An offset account and a redraw facility feel similar to a borrower and are treated quite differently here.
Only the Australian Government can activate the Financial Claims Scheme. APRA administers it once activated and aims to pay the majority of account holders within seven calendar days. That is only possible because of a standing obligation: every institution must maintain a single customer view, identifying each unique account holder and aggregating balances across all of that customer's protected accounts, and must be able to generate that data within 48 hours of a declaration and transmit payment instructions within 24 hours after that. The capability is externally audited and attested annually by the chief executive.
Claims above the limit are not extinguished. They rank third in the order of priority in the liquidation. The Government funds the payout up front and any shortfall may be recovered later through an industry levy.
What the rate is compensation for
The Reserve Bank puts deposits from Australian households and businesses at around two-thirds of Australian banks' total funding, and bonds and other debt securities at around a third.
The Reserve Bank is direct about how banks behave within that. It notes that banks may raise deposit rates independently of any change in the cash rate in order to attract more deposits, because deposits are considered more stable than some other sources of funding, and that more competition among banks for deposit funding typically results in higher deposit rates. It also observes that deposit rates are less directly influenced by the cash rate than market reference rates are, and tend to move with a lag.
Put the pieces together and a deposit rate stops looking arbitrary. It is the price of funding whose regulatory cost the bank can calculate precisely, and the features that make an account attractive to a rate-shopper are the same features that make it expensive to the bank.
Where to look next
- Savings account rates - the reference page for the category.
- Term deposit rates - the locked alternative.
- How the yield curve prices a term deposit - why a longer term does not automatically pay more.
- Term deposit - the term in glossary form.
Sources
- APRA, Prudential Standard APS 210 Liquidity (July 2025) - the standard's authority and commencement, the 100 per cent minimum coverage ratio, the definitions of retail, stable and less stable deposits, the cash outflow categories of 5, 10 and 25 per cent, the scorecard features and their points and the score thresholds, the named characteristics of deposits considered more likely to be withdrawn, the exclusion of fixed-term deposits beyond 30 days and the conditions attached, the reclassification consequence of permitting early withdrawal and the hardship carve-out, and the stable funding factors and maturity convention over the one-year horizon
- APRA, Prudential Standard APS 910 Financial Claims Scheme - the single customer view obligation, the 48-hour data generation and 24-hour payment instruction windows, and the external audit and annual attestation requirements
- Banking Regulation 2016 - the prescribed $250,000 limit, the list of protected account types including offset accounts that are separate deposit accounts, and the list of accounts that are not protected including those at a foreign branch
- Banking Act 1959 - the financial claims scheme division for account holders with insolvent institutions, including the declaration and payment provisions and the limit on payments
- APRA, Overview of the Financial Claims Scheme and its banking FAQ - the per account holder per institution basis, that only the Australian Government can activate the scheme and that APRA administers it, the seven calendar day payment target, the exclusion of foreign branch deposits, the distinction between an offset account and a redraw facility that is not a separate deposit account, and the third-ranking priority of above-limit claims and the industry levy
- Reserve Bank of Australia, Explainer: Banks' Funding Costs and Lending Rates - deposits at around two-thirds of total funding with debt securities around a third, the statement that banks may raise deposit rates independently of the cash rate because deposits are more stable than some other funding, the effect of competition for deposit funding, and the weaker and lagged relationship between deposit rates and the cash rate
Not financial advice, and not a recommendation of any product or institution. Reviewed by the Tradergy editorial team, September 2026.
Common questions
Why do banks pay more for term deposits than savings accounts?
Because a locked deposit is worth more to the bank under the prudential rules. Australia's liquidity standard requires a bank to assume 10 or 25 per cent of a retail at-call balance walks out over a 30-day stress period, depending on its risk score, and to hold liquid assets against that. A term deposit with more than 30 days to run, and a break penalty materially greater than lost interest, is excluded from that calculation altogether.
What makes a deposit look risky to a bank?
APRA's standard scores four features. A balance above the government guarantee limit scores two points, an online account scores two, the absence of an established customer relationship scores one, and a heavily rate-driven deposit scores one. A total of three or more moves the assumed run-off from 10 per cent to 25 per cent. A rate-shopped online balance above the cap scores highly on all four.
What does the Financial Claims Scheme cover?
Up to $250,000 per account holder per authorised deposit-taking institution, a limit set in the Banking Regulation 2016. It covers savings accounts, term deposits, transaction and cheque accounts, and offset accounts that are separate deposit accounts. It does not cover deposits at a foreign branch of an Australian bank, or redraw facilities that are not separate deposit accounts.
Who activates the deposit guarantee?
Only the Australian Government can activate it. APRA administers it once activated and aims to pay the majority of account holders within seven calendar days. To make that possible every institution must maintain a single customer view, be able to generate that data within 48 hours of a declaration and transmit payment instructions within 24 hours after that.
What is a savings rate actually buying?
Funding the bank must assume can leave. Deposits supply around two-thirds of Australian banks' total funding, and the Reserve Bank notes that banks may raise deposit rates independently of any cash rate change to attract deposits, because deposits are more stable than some other funding sources. The rate is compensation for supplying money the bank would rather have for longer.