A levy on major banks and improving accountability for bank executives

Budget Review 2017–18 Index

Phillip Hawkins and Kali Sanyal

The Treasurer announced reforms to the banking sector in the 2017–18 Budget. These reforms include a new tax, described as a ‘major bank levy’, and measures to create ‘a more accountable and competitive banking system.’[1] In his Budget in reply speech, the leader of the opposition Bill Shorten indicated support for the major bank levy.

A levy on major banks

A tax of 0.06 per cent will be applied to the liabilities of banks meeting certain size criteria, with the effect that, initially, it will apply from 1 July 2017 to the five largest banks (ANZ, Commonwealth, NAB, Macquarie and Westpac).  The tax is expected to raise $6.2 billion over the forward estimates or around $1.5 billion annually. The tax will apply to: ‘corporate bonds, commercial paper, certificates of deposit, and Tier 2 capital instruments’. It will not apply to additional Tier 1 capital and customer deposits protected by the Financial Claims Scheme (FCS).[2][3] Large deposits (not covered by the FCS) would be subject to the new tax.[4] The tax will require legislation to implement.

Impact on competition

The five major banks together provide 84 per cent of lending for housing, and 81 per cent of gross loans and advances.[5] All other banks, credit unions and building societies are below the required size threshold.[6] Due to a number of commercial and market factors (including size), the major banks can access wholesale funding at lower costs than their smaller competitors. [7] The tax would reduce this funding advantage, making it easier for smaller authorised deposit-taking institutions[8] (ADIs) to compete.

Customer Owned Banking Association (COBA) chief executive Mark Degotardi has welcomed the ‘attempt to reduce the unfair funding cost advantage enjoyed by the biggest players’.[9]

Passing costs to consumers

When asked on Lateline whether the tax would be passed on to consumers the Treasurer stated:

It's not a tax on bank deposits... It's not a tax on mortgages. The ACCC will be tasked to ensure that banks do not mislead customers. If they are going to put people's prices up, then they have to tell the truth about it.[10]

As Australian Bankers’ Association chief executive Anna Bligh commented, the tax revenue must have an impact on ‘depositors, borrowers or shareholders’.[11] A research note from Morgan Stanley stated that:

... Over the past two years, the banks have demonstrated their willingness to use oligopoly pricing power in retail banking to respond to regulatory changes and pass on higher funding costs. In our view, they will try to offset the impact of the levy via lower rates on deposits and/or higher rates on mortgages ... we estimate that the four major banks would need to raise home loan SVRs [standard variable rates] by ~20bp [basis points] to offset the earnings impact of the levy ... .[12]

The value of government support

Analysts from the Reserve Bank of Australia (RBA) and other entities have noted that Australia’s major banks receive a financial benefit because of the perception that if there were a crisis, they would receive government support.[13] There have been a number of attempts to estimate the value of this support to the major banks. The COBA commissioned research in 2014 which suggested the value of the implicit guarantee was between $2.9 and $4.5 billion.[14] The RBA has estimated that the total value of the subsidy in 2013 was between $1.9 and 3.7 billion.[15]

A more accountable and competitive banking system

In order to make bank directors and executives more accountable to the regulators, the Treasurer will establish a new Banking Executive Accountability Regime which will:

  • require banking executives to register with the Australian Prudential Regulation Authority (APRA),
  • provide APRA the power to impose penalties on banks for failing to appropriately monitor the suitability of their executives to hold senior positions (a maximum of $200 million for larger ADIs and $50 million for smaller ADIs)
  • strengthen APRA’s powers to ‘remove and disqualify’ senior executives and directors from APRA-regulated institutions and
  • introduce a requirement that a proportion of executive’s bonuses be deferred for at least four years, and provide APRA stronger powers to require banks to review and adjust remuneration policies.[16]

The Budget included other measures to enhance competition, including establishing:

  • the Australian Financial Complaints Authority (AFCA), which will consolidate the Financial Ombudsman Service, the Credit and Investments Ombudsman and the Superannuation Complaints Tribunal into a single ombudsman, providing consumers with a ‘one-stop shop’ for complaints resolution[17]
  • an open banking regime, aimed to increase access to banking product and consumer data by consumers and third parties (based on consumer consent)
  • a Productivity Commission inquiry of the state of competition in the financial system. In addition, the Australian Competition and Consumer Commission (ACCC) will receive an extra $13.2 million over four years to conduct regular, in-depth inquiries into specific financial system competition issues, and
  • a ACCC residential mortgage pricing inquiry that will require ADIs to explain changes to residential mortgage pricing, particularly in light of the new major bank tax.

These budget decisions follow from a growing disquiet among the wider community about executive accountability and market concentration among the major banks. The changes to improve governance respond to concerns raised in a report by the House of Representatives Economics Committee,[18] and are similar to regulatory reforms introduced in the United Kingdom.[19] Some in the media argued that the measure was part of a Government’s strategy to ward off a challenge from the Labor opposition to hold a Banking Royal Commission.[20]



[1].          The budget figures and measures in this brief have been taken from the following document unless otherwise sourced: Australian Government, Budget measures: budget paper no. 2: 2017–18, 2017; ibid., p. 24 and pp. 160–161.

[2].          Australian Government, Budget measures: budget paper no. 2: 2017–18, p. 24. Bank capital is funding to which losses can be allocated: Tier 1 capital includes ordinary shares and retained earnings, ‘to which a bank can most freely allocate losses without triggering bankruptcy’. Tier 2 primarily consists of subordinated debt, which ‘in many cases are only effective at absorbing losses when a bank is being wound up’ (A Gorajek and G Turner, ‘Australian Bank Capital and the Regulatory Framework’, Bulletin, Reserve Bank of Australia, 2010, pp. 43–44).

[3].          The Financial Claims Scheme covers deposits up to a value of $250,000 per account holder per ADI (Australian Prudential Regulation Authority (APRA) ‘Financial Claims Scheme’ APRA website.

[4].          M Janda, ‘Federal Budget 2017: Banks face new tax, bigger penalties for misconduct’, ABC News, 10 May 2017. 

[5].          P Karp, ‘Australia’s big banks hit by $6.2bn levy in budget cash grab’, The Guardian, 9 May 2017; Parliamentary Library estimates based on Australian Prudential Regulation Authority, Monthly Banking Statistics, March 2017.

[6].          J Durie, ‘Future Fund reprieve’, The Australian, 10 May 2017.

[7].          Financial System Inquiry, Interim report, July 2014, p. 2-12.

[8].          ADIs include banks, credit unions and building societies

[9].          Customer Owned Banking Association, COBA comment on Budget, media release, 9 May 2017.

[10].       S Morrison (Treasurer), Transcript of interview with Leigh Sales: ABC 7:30, transcript, 9 May 2017, p. 3.

[11].       D Speers, ‘Budget 2017 with David Speers, SKY News, 9 May 2017.

[12].       Joshua Roberts (@jrojourno), ‘Oh goody. Big four banks will use “oligopoly pricing power” to hike mortgage rates to compensate for $6b fed govt levy, say Morgan Stanley’, tweet, 10 May 2017, accessed 10 May 2017, https://twitter.com/jrojourno/status/862088018789769216.

[13].       D Hughes, Do large Australian banks receive an implicit public subsidy?, Reserve Bank of Australia, 23 January 2015, pp. 1–9; FitchRatings, Commonwealth Bank of Australia, 12 June 2015, p. 1; Moody’s Investors Service, Credit Opinion: Commonwealth Bank of Australia, 20 December 2015; S&P Global Ratings, Commonwealth Bank of Australia, 21 December 2016.

[14].       Customer Owned Banking Association, Second round submission to the Financial System Inquiry, August 2014, p. 14.

[15].       D Hughes, ’Do large Australian banks receive an implicit public subsidy?, op. cit., p. 44.

[16]        S Morrison (Treasurer), Building an accountable and competitive banking system, media release, 9 May 2017, p. 2.

[17]        J Brown (Consumer Action Law Centre) Budget 2017: New Australian Financial Complaints Authority, media release, 10 May 2017.

[18].       House of Representatives Standing Committee on Economics, Review of the Four Major Banks (Second Report), House of Representatives, Canberra, 21 April 2017, p. xiii.

[19].       McGuireWoods LLP, Making bankers accountable, The Fraud Board, blog, accessed 10 May 2017.

[20].       Our Verdict, The Daily Telegraph, 10 May 2017, p. 16.

 

All online articles accessed May 2017. 

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