ADCM Services, a consultancy group that specialises in Australia’s debt capital markets, is the latest to warn that 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, which they argue could end up lowering their funding costs and actually raise their profits. From the Herald-Sun:
ADCM Services… says the levy crystallises the “protected status” of the big banks.
It means the implicit guarantee that the government provides to the major lenders is now “all but iron-clad”, the group says.
As a result, it says, the big banks will likely have to pay less for the money they borrow in global markets to lend to consumers and businesses in Australia, allowing them to fatten their profit margins…
In late May, the [S&P] ratings agency said it believed the major banks would receive “timely financial support from the Australian Government” if there were a crash in the housing market.
“This explicit recognition of the protected status of the major banks should now see the cost of the banks’ senior unsecured debt fall, and fall by more than the cost of the … bank levy,” Dr Bayley said…
“Bank profits have been preserved and the banks owe S&P a debt of gratitude,” Dr Bayley said.
“The major banks can now look forward to a lower cost of funds, but the downgraded (regional and other lenders) will see their cost of funds increased by more than the rate of the bank levy”…
Dr Bayley said S&P’s move after the levy was announced had increased the competitive strength of the big banks relative to smaller lenders, tilting “the playing field in favour of the major banks once more.”
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 Dr Bayley 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.
That said, 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.
