Bank deposits levy too small?

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ScreenHunter_06 Jun. 26 22.42

By Leith van Onselen

Despite all of the bleating over the Rudd Government’s proposal to implement a modest levy on deposits to cover the cost of any future bank bailout, an analysis by NAB’s head of fixed income and credit, Michael Bush, has shown that the funds raised would not even cover the costs of bailing out the Bank of Queensland, let alone one of the Big Four banks. From the AFR:

…the initial $700 million in the [financial stability] fund is “unlikely to be anywhere nearly big enough to cover the government’s future liability”, should an Australian bank fail.

“25 per cent of BOQ’s deposits will still be close to 10 [times] the fund size and the interest expense between the government paying out under the FCS [Financial Claims Scheme] and getting reimbursed from a wind up process would be greater than the fund,” Mr Bush said in a note sent to clients.

“The argument can be made though that it’s better to have something in the kitty than nothing.”

“From the government trying to lessen the scale of its contingent liability to a failing bank by pre funding it – seems reasonable.”

“But in reality it probably needs a whole lot more than $700 million to cover an actual loss and/or get a rating agencies more comfortable about economic management and reducing its contingent liability risks are to its banking system”…

NAB’s Mr Bush said the cost to an average depositor would be about $20 a year, if the cost was passed on by the bank.

As noted by Houses & Holes last week, the deposits levy is a step in the right direction, although it is likely too small (as confirmed above) and should have been devised after a wide ranging enquiry into the financial system.

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That said, the fact that the Coalition is yet to denounce the proposed scheme is encouraging and suggests that it might actually be implemented.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.