The Australia Institute’s (TAI) Matt Grudnoff has penned an excellent paper urging other states to follow South Australia’s lead and implement their own bank levy.
Grudnoff argues that the banks are “very capable” of paying the levy given their privileged place in the economy and that a state bank levy is a way to reduce states’ reliance on the federal government, thereby helping to overcome the vertical fiscal imbalances that dog the federation.
Below are some key extracts of this TAI report, along with a few key graphics:
The announcement of a new state level bank levy in South Australia has upset the big banks. This is not surprising and the big banks along with their lobby group the Australian Bankers Association have launched a self-interested campaign to stop the levy. Like most industry political campaigns it relies on exaggerated claims about the impact of the bank levy on ordinary people and the South Australian economy…
These kinds of self-interested campaigns have become far more popular since the success of the campaign against the mining tax. While it is not surprising that industries would wage such campaigns it is surprising that the general public would be influenced by them…
The South Australian bank levy is designed in the same way as the federal bank levy. Banks cannot avoid the levy by not banking or investing in South Australia. The proposed levy will therefore not disadvantage South Australia compared to any other state or territory.
The South Australian bank levy is proposed at 0.0036 per cent or 0.36 basis points. That is $3.60 in every $1,000,000 of determined liabilities. It is expected to raise about $90 million per year over the next four years. Together the five CEOs of the big banks make about half of what the levy is expected to raise each year. The amount the levy is expected to rise also represents just 0.2 per cent of the $44 billion in pre-tax profits the big five made last year…
Australian banks are the most profitable in the world. Bank profits as a percentage of GDP are two and half times larger than the United States and three times larger than the United Kingdom. The profitability of the banks is somewhat surprising when you consider that banks are just a utility; they provide a payments system and are intermediaries between savers and borrowers. They do not actually build or produce anything themselves.
Banks high rates of profit are derived from a number of factors. The first is that the big four banks make up an oligopoly. They represent about 80 per cent of the market and such a high market shares means they have a large amount of market power. This market power allows them to earn large profits. They also operate in an environment that is highly regulated and they benefit from that regulation. They are largely protected from being taken over by foreign banks.
They are also implicitly guaranteed by the government because they are deemed too big to fail. This comes about because the collapse of a major bank would impose enormous economic, social, and fiscal costs on the economy, and the federal government quite rightly would want to ensure that this doesn’t happen…
IMF researchers suggest the implicit guarantee given to large banks by the government ranges in value from at least 20 basis points of their total balance sheet, to 100 basis points or more (during times of instability). The RBA estimated the value of the guarantee at 20-40 basis points on average since 2000. During a financial crisis the guarantee is worth much more than this. During the 2008-09 crisis the support given the large banks by the Australian government allowed them to absorb smaller, more fragile institutions – hence the banks emerged even bigger and stronger.
The cost to the banks of the levy is small relative to the private benefit of the implicit guarantee. The federal levy is six basis points and South Australia is proposing a levy that is six per cent of that or 0.36 basis points. That’s 0.0036 per cent or $3.60 in every $1,000,000 of defined liabilities. So the total bank levy in Australia would increase to 6.36 basis points.
Even if every state implemented the same levy as the South Australian government then this would only add another six basis points for a total of 12 basis points. This is far less than the lower bound of the estimated value of the implicit guarantee of 20 basis points…
The government has the power to protect banks from collapse through various measures including the injection of emergency liquidity (often facilitated through the central bank), regulatory changes (eg. controlling deposits to limit capital flight), deposit guarantees to stabilize confidence (like those introduced by the Rudd government in 2008), or public equity investments and even outright nationalization as happened in the UK during the Global Financial Crisis.
This means that the large banks are perceived as safer than the smaller banks and this brings two benefits. First people are more likely to bank with them. And secondly they face smaller borrowing costs because capital markets feel more confident they will be able to pay their debts…
The bank levy is not a new idea and has been implemented in many other countries around the world, particularly in Europe… There are at least 14 countries in Europe which imposed bank levies after the GFC, on the advice of the IMF. The IMF recommended a maximum levy of 20 basis points… This along with the size of the levy means it will have no material impact on sovereign risk.
The bank levy also represents a good opportunity for the federal government to encourage state governments to raise more of their own revenue. The federal government has recently complained that the states are too reliant on it for their revenue. When the states want more revenue they have in past suggested the federal government increase the GST. This means the states get all the revenue and the federal government suffers all the political pain of increasing a tax… Rather than increase the GST the federal government suggested the states should rely less on them for revenue and instead raise their own taxes…
The decision of the South Australian government to impose a bank levy should therefore please the federal government. The revenue from the South Australian bank levy will go directly to the South Australian government and any political fallout for the levy will also be borne by the South Australian government. Also since the federal government has just implemented the same kind of levy then it is reasonable to assume that they’re generally happy with this kind of taxation measure.
It would seem prudent for the federal government to encourage other state governments to follow the South Australian government’s lead and implement bank levies in other states. This would increase state government revenues without the federal government having to hand over additional money. COAG would seem to be the best forum to coordinate this exercise and the federal and state governments should consider working together to create a state government bank levy in all states and territories. There have been reports already that the Western Australian government is considering a bank levy of its own.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
