Australia’s four major banks are able to access wholesale funding at cheaper rates because of an implied guarantee that the federal government will not let them fail because of their size. ME Bank CEO Jamie McPhee says governments should tax the bigger banks because they get cheaper funding as a result of the “too big to fail” guarantee, and that this would make it easier for smaller banks to compete. From The Australian:
“We’re not asking for a handout. We’re asking to compete fairly. That it’s in the best interest of the consumer,” Mr McPhee said…
Due to the implicit government guarantee enjoyed by Commonwealth Bank, Westpac, ANZ and National Australia Bank, as they are considered too large to be allowed to collapse, investors charge less for funding the banks than for smaller lenders that aren’t considered too big to fail.
This gives the big banks access to wholesale funding about 20 basis points cheaper.
“The ratings agencies are giving a three-notch ratings uplift to the major banks,” Mr McPhee said.
“That implicit guarantee is being provided by the taxpayer. The appropriate body, whether it is the Reserve Bank or Treasury, should do that calculation and the banks should pay that back to the rightful owner, which is the taxpayer. It should become part of the annual budget cycle,” he said.
The federal government already charges the banks a 0.06% levy on their liabilities, which is budgeted to raise around $6 billion in revenue over four years. However, this is well below the actual implicit guarantee from the taxpayer, which the RBA estimated is worth between 20 and 40 basis points a year, or more than $5 billion.
The Productivity Commission’s (PC) final report on Competition in the Australian Financial System explicitly recommended that Australia’s banks “pay for any support they receive from taxpayers via the Australian government”. Therefore, the 0.06% levy on the liabilities of the Big Four banks and Macquarie should certainly be lifted to at least 20 basis points.
When you or I take-out insurance, we are required to pay. So should the banks.
Raising the bank levy, therefore, is good policy and a no-brainer.