Productivity Commission: Raise the bank levy

By Leith van Onselen

The Productivity Commission’s (PC) final report on Competition in the Australian Financial System has recommended that Australia’s banks “should pay for any support they receive from taxpayers via the Australian government” and, therefore, the 0.06% levy on the liabilities of the Big Four banks and Macquarie should be lifted.  From Banking Day:

“This simply reflects commercial reality in the finance sector,” a three-member panel, headed by Peter Harris, chair of the commission, declared in the report, released on Friday.

The report called on banks to “levy a fee [on their depositors] to guarantee the financial and contractual obligations of their customers.”

In turn banks can expect the government to levy a corresponding fee on them. The first instalment of such a fee – six basis points on “unguaranteed” deposits and wholesale liabilities, came into force last year.

Addressing the sensitive debate over whether select banks are beneficiaries from “expectations around government intervention for ‘too big to fail’ institutions,” the commission framed its commentary around the fact that each major credit ratings agency “holds similar expectations on government intervention”…

It’s good to see the PC addressing this issue.

The major banks benefit from an implicit guarantee from the taxpayer, which the RBA estimated is worth between 20 and 40 basis points a year, or more than $5 billion. 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.

The current bank levy ensures that the major banks will give back only 0.06% of this subsidy, or $6.2 billion over a four year period ($1.55 billion a year). Thus, the major banks are still ahead each year by up to $3.5 billion.

When you or I take-out insurance, we are required to pay. So should the banks. The bank levy is efficient precisely because it helps to internalise part of the cost of the Government’s support.

For a well-thought assessment of the bank levy, I highly recommend that you listed to The Australia Institute’s “Follow the Money” podcast: Episode 19 – why a bank levy is a great idea.

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