Major banks should pay more for being “too big to fail”, smaller banks argue, as the collapse of Silicon Valley Bank and the forced acquisition of Credit Suisse put Australia’s government guarantee in focus should a local bank face a run on its deposits.
The bank levy on the four major banks and Macquarie raised $1.55 billion for the government last year and is estimated to rise to $1.65 billion in 2025, as major banks progressively replace cheap funding under the Reserve Bank’s term funding facility with more expensive funding from overseas markets.
The major banks pay the government more than $1.6 billion a year for their implicit guarantee, but smaller lenders say the benefits from this support are much larger. Chris Ratcliffe
The levy – a 0.015 per cent quarterly tax levied on a bank’s sources of funding– was introduced by the Morrison government in 2017 to ensure the big banks pay some price for the implicit “too big to fail” subsidy that assumes they would be bailed out by the government in a severe banking crisis.
The major banks have always opposed the levy, describing it as a “tax on all Australians”. But smaller banks support it for helping to level the competitive playing field and to price the subsidy that has resulted in big banks receiving higher credit ratings. This lets them raise funding in wholesale markets more cheaply than smaller banks.
Smaller banks say the 0.06 per cent annual rate should be reviewed and potentially lifted given funding cost pressures set to hit smaller banks, making it tougher for them to compete.
“There are arguments to review [the levy] in the current environment. There is evidence to show they are not paying the full amount of the benefit they get from it,” said Mike Lawrence, CEO of the Customer Owned Banking Association, which represents 56 customer-owned banks that collectively have 5 million customers and loans of $160 billion.
“In the current environment, there is an argument to say it is too low.”
His comments come after former treasurer Wayne Swan said the government’s guarantee of deposits of up to $250,000 should be reviewed. The Financial Claims Scheme, as the deposit guarantee is known, applies to all banks and is separate from the implicit guarantee to bail out big banks that the levy responds to.
In question time in the Senate on Wednesday afternoon, Finance Minister Katy Gallagher was asked by Senator Malcolm Roberts to assure constituents that “every cent in every Australian bank account would be guaranteed” under the scheme.
She did not provide that assurance but said “when we have faced challenges in the banking system in Australia, which we are not facing now, the government – and I would presume this would have been on either side of the political fence – would act quickly to respond to any concerns that we saw in the banking system, which goes to your question about guaranteeing deposits. But we are not in that situation.
“The regulators advise us that the banks are well capitalised with good liquidity, they are profitable, they are engaging with regulators all the time and the government remains absolutely aware of the issues overseas, and is engaged with all of those, the banking system, the regulators and other stakeholders to ensure that remains the case, and if there were any concerns, the government would respond quickly,” Senator Gallagher said.
Mr Lawrence said the government should also focus on the levy. He said it could be raised because large banks’ funding advantage over smaller banks is set to expand given volatility and rising credit spreads in global bond markets still digesting the forced takeover of Credit Suisse by UBS.
“Funding costs will go up as a result of this, and potentially the differential between large bank funding costs and smaller lenders will widen. Funding costs for smaller lenders relative to bigger ones are disproportionately impacted because having the implicit guarantee potentially puts them in a better position to raise funds at a lower cost. That should be reflected in the fee that they pay to the government,” Mr Lawrence said.
“As our funding costs go up relative to theirs, it will put pressure on our ability to match lending rates, to continue to invest in our businesses, and to stay on top of regulatory and compliance requirements.”
Prominent economist Chris Richardson said last week that the bank levy could be raised to help pay for the cost of nuclear-powered subs.
“If it were to more accurately reflect the benefits the banks get from Canberra’s kid gloves, the levy could be lifted from its current 0.06 per cent closer to 0.25 per cent a year. If you’re wondering, that could generate an extra $4.5 billion to $5 billion a year for Canberra’s coffers,” he wrote in The Australian Financial Review.
Mr Lawrence, who will appear at The Australian Financial Review’s Banking Summit next week alongside Australian Banking Association CEO Anna Bligh, said more work needed to be done to determine the appropriate level for the levy.
“We would have to do the numbers. But my point is in we are in a fluid market on what may happen on funding costs, and that fee should then be reviewed in light of that. It goes to the heart of competition.”
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