Lordy, David Murray
Mr Murray, author of the Financial System Inquiry and former Commonwealth Bank CEO, said the announcement of the bank levy had all corners of the business community concerned.
“It’s a hate tax. So the question becomes, who else do we hate? Which sector comes next?” Mr Murray said.
…”The principle of taxation is either about equity or efficiency and this is neither,” he said.
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…
Pricing said guarantees is both equitable and efficient.
