Joye: Bank levy cheap!


Via our Chris:

If the two notch government support assumption is removed from these bonds, their cost would jump by 0.17 per cent annually to 1.11 per cent above cash based on the current pricing of identical securities. So the majors are actually only paying 35 per cent of the true cost of their too-big-to-fail subsidy.

Exactly the same math applies to Macquarie: if you normalise the rating on its senior bonds back to its BBB+ stand-alone credit profile, its borrowing costs increase by 0.17 per cent annually.

Requiring banks to pay a price for the implicit too-big-to-fail subsidy is universally regarded as best practice because it minimises the significant moral hazards of having government-backed private sector institutions that can leverage off their artificially low cost of capital to engage in imprudent risk-taking behaviour.

During the global financial crisis the government took the unprecedented move of offering to guarantee the safety of all banks’ deposits and senior bonds. While the bond guarantee has expired, the government continues to guarantee all deposits up to a $250,000 cap for free.

Treasury and the Reserve Bank formally advised the government to force banks to pay for the benefit of this separate subsidy, advocating a price of around 0.05 per cent annually.

Former Treasurers Joe Hockey and Chris Bowen both embraced this idea, which was then oddly rejected by the chairman of the financial system inquiry, David Murray. In an otherwise outstanding root-and-branch review, this was one recommendation that never made sense.

Precisely. Silence you fattened whingers.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.