There is the usual bleating from the lobby but for the most part Treasurer Chris Bowen’s new bank levy is being well received. Several serious commentators give it the tick of approval. Chris Joye claims it as his own:
The political and economic ramifications of the move are interesting. For years I’ve been calling on governments to price the subsidy the banking system receives through Australia’s free taxpayer guarantee of deposits, which is internationally anomalous and heightens the moral hazard of executives.
The Coalition privately says it planned on implementing the proposal after the election. Kevin Rudd and Chris Bowen have now taken that opportunity away from them, which is smart. And they have shown some courage in overcoming the powerful banking lobby.
The fixed nature of the fee means that smaller deposit-takers will benefit much more from the guarantee than the major banks. Defaults and bank failures are more likely among the former.
On the other hand, the majors get to capitalise on their loftier credit ratings and cost of funds advantages in the wholesale bond market, which supposes that they are “too big to fail”. Standard & Poor’s ratings methodology explicitly assumes that only the major banks will get a government bailout. Smaller banks have relatively lower credit ratings and higher funding costs as a result.
Research Director at the Australian Centre for Financial Studies Kevin Davis argues that no pre-existing bailout fund is needed because depositors will still be effectively insuring the bank even if charged after an accident through post-event fees. Nonetheless he endorses the move based upon the competition argument and explains:
Imposing a fee on guaranteed deposits would lead to some mix of three outcomes: banks would reduce deposit rates paid, they would increase loan rates, or shareholder returns would fall.
Either of the first two outcomes would improve the relative position of non-guaranteed competitors in funding and loan markets – arguably moving the system towards a more level playing field, although it is so twisted, pitted and pockmarked by taxes and regulation that it is hard to be definitive about consequences.
The outcome regarding the last possibility would provide some evidence on the extent to which there is adequate competition in banking.
…Provided that APRA can meet the costs of effectively resolving a bank failure by access to a budget provision (which it already has), there is nothing to be gained by having a separate fund which could grow without limit if APRA supervision (and good bank management) retains Australia’s unblemished reputation for bank safety.
John Kehoe points out that the fee is likely equitable:
Reserve Bank of Australia analysis shows that the major banks would bear 76 per cent of the cost of a flat fee, based on its analysis in 2011. This is because the big banks hold the most deposits.
If the government opted for a varied rate and made it available publicly, this could create adverse signalling to the market about the perceived risks of banks and damage some institutions.
I would have preferred a more deliberate policy process but even it is surprising to some, the levy is no bolt from the blue, argues Banking Day:
More than two decades of dithering over the merit of funding a deposit insurance scheme in Australia looks to be over, with the Federal Government set to outline today what this insurance will cost banks…The need for a formal system of deposit insurance has been apparent since the run on building societies in Victoria in 1990, leading up to the collapse of the Pyramid Building Society.
With no deposit insurance scheme in place, all Victorian taxpayers wore the cost, through a three cents per litre levy on petrol, a tax that remained for five years.
However, the Wallis committee, in the 1990s, decided there wasn’t much merit in deposit insurance (in spite of having support from the Reserve Bank of Australia).
It took the failure of HIH Insurance, in 2001, to create the momentum for a serious study of the options.
…The financial crisis of 2008 finally activated the Financial Claims Scheme, but without any long-term funding mechanism being put in place.
In 2012, the International Monetary Fund wrote, in its “Financial System Stability Assessment” report on Australia, that “the ex-post funded deposit guarantee program (the Financial Claims Scheme) seems inadequate to address a contagion risk… [where] stress in one bank [is] quickly transmitted to others.”
Banking Day also notes that “the Government is thought to be planning to have the levy paid into a dedicated fund, which is a common model offshore” which assuages some of my concerns about the integrity of the entity.
At Loon Pond headquarters, however, it’s a parade of negativity with John Durie, David Crow, the Editorial, Bartho and the Herald Sun all finding fault.
My own view is the process is flawed, we need an inquiry to discuss such matters in their entirety (though I must say I fear it would be hijacked by the cavaliers of credit) and it’s far too small a charge.
Still, it does address moral hazard across the system, does increase competition for the majors which can, over time, reduce their too-big to-fail status and is a step in the right direction. It really should be the thin end of wedge.
