As revealed over the weekend, Treasurer Joe Hockey has suggested the Government will implement Labor’s planned deposits levy of five basis as part of the May Budget, which could raise up to $500 million a year. From The AFR:
The bank tax, as proposed by Labor ahead of the 2013 election, where it lost government, would be a 0.05 per cent levy on every deposit of up to $250,000. It was scheduled to start on January 1, 2016, and budgeted to raise $733 million in its first 18 months of operation…
The money would be put in a Financial Stability Fund and be used to protect depositors against the highly unlikely event of a bank collapse. In the meantime, the fund would also be used to offset gross debt. If the Coalition adopts the same model as Labor and if banks pass the levy on to customers, it would mean a term deposit currently paying 2.6 per cent would pay 2.55 per cent.
I view the deposit guarantee as a good idea, since it would explicitly price the subsidy the banking system receives via Australia’s free taxpayer guarantee of deposits, ending the free ride. It would also move Australia into line with international norms, whereby deposit insurance is explicitly levied (the US Federal Deposit Insurance Corporation being the most notable example).
As noted by Chris Joye today, there are some concerns that smaller authorised deposit taking institutions (ADIs), which are more reliant on deposits for their funding (typically 80% to 90%), would be adversely affected relative to the big banks, which are around 60% deposit funded.
However, the fixed nature of the fee (5 basis points) also means that smaller ADIs could also benefit more from the scheme, since defaults and bank failures could be greater amongst these institutions.
Australia’s banking system receives massive implicit taxpayer support, with the credit ratings agencies ascribing a two notch upgrade to the Big Four’s credit ratings due to their ‘too-big-to-fail’ status and the expectation that taxpayers will backstop the banks in times of stress.
The least we can do is demand some compensation for this support. The deposit levy is a start, albeit a modest one.
