Mark Burgess, the former MD of the Future Fund, has warned that the Turnbull Government’s 0.06% levy on big bank liabilities has made the guarantee by the government to bail out the major banks explicit, thus creating expectations that it perhaps did not envisage. In turn, Burgess claims the banks may feel that they can take unnecessary risks. From The AFR:
Treasurer Scott Morrison came close to acknowledging the implicit guarantee that the government would step in and save the big four and Macquarie in a crisis when he spoke of the “special position” the banks hold during question time on Wednesday.
Former Future Fund managing director and newly appointed chairman of industry fund HESTA’s investment committee, Mark Burgess, said the federal government’s decision to raise a new tax on the five banks that benefit from the guarantee made it explicit.
“The real story here is not only has the government introduced a tax but perhaps also that it has created an explicit guarantee,” Mr Burgess said on Thursday at a business breakfast held by Hamilton Wealth Management in Melbourne.
Making the guarantee explicit would expose the federal government’s already stretched balance sheet to billions in additional contingent liabilities, effectively unwinding the fiscal benefit of the funds raised by the levy.
Explicit government backing would also cement the position of the banks as “too big to fail”, introduce the concept of moral hazard and promote excessive risk taking at the banks.
Implicit. Explicit. Who cares? The fact remains that everybody – the bankers, the government, the ratings agencies – knows that the federal government will be called upon to bail the big banks out should they get into trouble. This guarantee is why the big banks receive a three notch ratings upgrade on the smaller banks, who are not considered to be government-guaranteed.
Would Mr Burgess seriously prefer that the banks continue to be guaranteed implicitly and pay nothing for the privilege? To pretend that there is a material difference between being implicitly guaranteed and explicitly guaranteed is semantics. Australian taxpayers will be on the hook regardless. So we might as well make the whole system of guarantees transparent and price them accordingly.
If anything, the levy should be raised to roughly triple the proposed level, given the big banks enjoy an estimated 20bps to 40bps funding advantage because of the government guarantee, according to the RBA.
