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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