David Murray has returned to his CBA roots, appearing on ABC’s The Business last night to lobby against the Turnbull Government’s 6 basis point (0.06%) levy on the Big 5 banks’ liabilities (watch video here).
According to Murray, the levy is somehow a “very bad idea” and “bad policy whichever way you look at it”, and would either be passed onto customers, resulting in an out-of-cycle interest rate hike, or would reduce bank capital by passing money to the Government.
When confronted about the extraordinary support the banks receive from taxpayers, which has enabled Australia’s banks to become the most profitable in the world, Murray instead denied that such public support exists, claiming “there’s a lot of myths there”.
This view directly contradicts the Murray Financial System Inquiry’s Final Report, which noted:
Actions taken by governments both in Australia and overseas to support their financial sectors during the GFC have reinforced perceptions of an implicit guarantee. Implicit guarantees arise when creditors believe that, if a bank were to fail, the government would step in to rescue the institution.
Implicit guarantees reduce banks’ funding costs by moving risk from private investors onto the Government balance sheet — a contingent liability for Government. As a result, the creditor takes no (or a reduced) loss, making it less risky to invest in the institution. Creditors will therefore accept a lower interest rate, which lowers funding costs for the bank and provides a competitive advantage to those institutions most affected.
Empirical studies have found that Australian ADIs, especially the largest ADIs, benefit from an implicit guarantee. This is also evident in the credit ratings of the major Australian banks, which all receive a two-notch credit rating uplift from credit rating agencies Standard & Poor’s and Moody’s due to expectations of Government support. Implicit guarantees create inefficiencies by:
• Providing a funding cost advantage for banks over other corporations.
• Giving large banks an advantage over smaller banks.
• Weakening the market discipline provided by creditors.
• Potentially creating moral hazard that encourages inefficiently high risk taking…Perceptions of an implicit guarantee introduce a range of damaging distortions into the financial sector that reduce efficiency. They also transfer risk from the banking sector to taxpayers. In the Inquiry’s view, such factors make it appropriate to take steps to minimise implicit guarantees…
The fact remains that taxpayer support for Australia’s banks has increased significantly since the GFC, without commensurate obligations from the banks. In addition to the implicit guarantee, which has lowered the banks’ credit ratings by two notches, we also witnessed the implementation of deposit insurance, the ability to issue covered bonds, as well as access to the RBA’s committed liquidity facility. Each form of support has provided the banks with cheaper funding and the ability to generate greater profits.
What better way to internalise some of the cost of the government’s support than extract a modest return to taxpayers via the 6 basis point levy on big bank liabilities?
Once a banker always a banker, I guess.
