On 19 June 2017, the Parliament passed the Major Bank Levy Bill 2017 and the Treasury Laws Amendment (Major Bank Levy) Bill 2017 to introduce a new ‘major bank levy’ on banks with over $100 billion in total liabilities. Currently, based on this threshold, it will apply to the five largest banks: Commonwealth Bank, ANZ Bank, Westpac, National Australia Bank and Macquarie Bank. The proposal was announced by the Government in the 2017-18 Budget and is expected to raise around $1.5 to $1.6 billion per annum every year, net of increased deductions for other taxes. The levy will apply from 1 July 2017.
The levy rate is set at 0.015 per cent, paid each quarter on the balance of a bank’s liabilities (essentially, its sources of funding) with a number of exclusions including deposits covered by the Financial Claims Scheme, some of the banks’ high-quality prudential capital and the exchange settlement accounts held with the Reserve Bank (which banks use to settle day to day transactions with other banks).
Why is the Government introducing the Major Bank Levy?
The Explanatory Memorandum (EM) to the Bills expresses the policy objectives of the levy as:
ensuring that the banking sector makes a fair contribution to the economy given its unique role in Australia’s economy and the associated systemic risks that it imposes
improving competition and accountability and
complementing prudential reforms.
Contribution of the banking sector to the economy
The revenue raised by this tax is expected to contribute to reducing the budget deficit in the short-term and to strengthening the structural fiscal position over the longer term.
The objectives also refer to the banks making a contribution for the systemic risk they pose. The major banks arguably benefit from the perception that the Government would bail them out if they got into distress, in order to prevent contagion effects in financial markets and to the broader economy. The Reserve Bank of Australia estimated the implicit subsidy to the major banks at between $1.8 billion and $3.75 billion per annum, as at 2013.
In 2010, The IMF recommended a similar tax (called a Financial Sector Contribution) as a form of insurance scheme in the event that Government funds were required during a banking crisis. The IMF envisioned that such a tax could be paid into a fund (set aside for the purposes of funding responses to banking crises) or go to general government revenue. A number of countries have adopted similar taxes some of which are used to contribute to resolution mechanisms (e.g. the European Single Resolution Mechanism) while others go directly to general revenue, such as the UK’s bank levy.
Competition and accountability
The EM also identifies providing a more ‘level playing field’ for smaller banks as an objective of the levy. The Australian banking sector is heavily concentrated by global standards with the 5 major banks holding around 80 per cent of the domestic bank deposit market and 80 per cent of the lending market.
The Financial System Inquiry noted that the banking sector has become more concentrated since the global financial crisis and that this reflects in part the acquisition of St George and Bank West by Westpac and Commonwealth bank respectively but also the ongoing ‘funding advantage’ that the major banks have over their smaller competitors due to their size, greater access to international capital markets, their diverse lending portfolios and sophisticated risk management systems.
The levy seeks to reduce this advantage, by increasing the funding costs of the major banks relative to their smaller and international competitors. The RBA estimated that the funding gap between the major and other Australian banks was about 75 basis points in 2015. The smaller banks, credit unions and building societies welcome the competition benefits of the levy, although the Customer Owned Banking Association view it as a ‘modest step’ towards improving competition.
In reality, it is difficult to determine what sort of competition benefits that may arise from the levy. Ultimately, consumers will need to vote with their feet and take advantage of better offers made by competitor banks. The Senate standing Committee’s inquiry into competition within the Australian banking sector found that a large number of customers still see switching banks as too much trouble or a waste of time.
Impact on Prudential Stability
The EM states that the levy has been designed to complement prudential policy. Excluding certain types of regulatory capital from the levy seeks to ensure that it does not harm APRA’s prudential objectives, while excluding deposits covered by the Financial Claims Scheme is intended to provide an incentive for the major banks to increase their reliance on ‘more-stable, deposit-based funding’.
Wayne Byres, Chairman of the Australian Prudential Regulation Authority, stated in Senate Estimates that APRA does not expect that the levy would have a significant impact on its prudential objectives or the resilience of the banking system.
Will the costs be passed on to consumers?
Who bears the incidence of the bank levy will ultimately be a commercial decision for the banks. Notwithstanding pressure from the government not to pass the levy on to consumers, the EM to the Bill states that it is not possible to be ‘unequivocal as to the ultimate incidence of the levy’. Dr Ken Henry the Chairman of the National Australia Bank noted that banks could pass it on to their deposit or lending rates, invest less in its staff or in new products, or pass the impacts on to its shareholders. While the ACCC has been tasked to examine the impact of the levy, the Chairman Rod Sims has reportedly stated that it does not have the power to stop the banks from passing on the levy.
The Senate Economic Legislation Committee’s report on the Bills recommended that the levy be reviewed in two years to examine whether the policy is meeting its stated objectives, the effect it has on competition in the banking market and whether it is required in perpetuity once the Budget has returned to surplus.