Treasurer Joe Hockey looks set to slug the big banks with a new 0.05% levy on all guaranteed deposits up to $250,000 but exempt smaller banks, credit unions and building societies.
While the banking industry has known the deposit levy, first proposed by the previous Labor government and endorsed by the Murray Inquiry, has been coming for some time, the exemption of Australia’s smaller players is likely to be resisted by the big banks and the Australian Bankers Association (ABA).
That’s because at a time when their share prices have been under pressure from capital raisings and worries around earnings pressure, the levy, which is budgeted to raise around $500 million per annum and placed in a special financial stability fund, is likely to be viewed as another impost on the big banks.
ABA CEO Stephen Munchenberg told Fairfax this morning it was unfair and suggested that it’s the smaller banks, not the too-big-too-fail major banks, who are the threat to Australia’s financial stability.
“The depositors are funding a scheme that would only be of use to the smaller banks because they are the likely ones to go under. There’s no reason to do this other than it helps the budget bottom line,” Munchenberg said.
It’s unlikely APRA chairman Wayne Byers would appreciate what Munchenberg has just said about most of Australia’s banking industry, nor what it implies about APRA’s oversight.
But what Munchenberg ignores, however, is that the big banks are the ones that directly benefit from investors’, and crucially credit rating agencies’, belief that the government would have no choice but to bail them out if they got into trouble. That is, the market believes it’s the big banks, not the smaller institutions, that would be the beneficiaries of a Government bailout.
That means that Australia’s big banks get a credit ratings uplift of between one and two notches.
That is important to this debate because it directly lowers the big banks’ costs of funds in wholesale markets where they source more than 30% of their total funding mix.
Most observers would argue that credit rating uplift, and the too-big-too-fail status, is worth significantly more than 0.05% – 5 basis points – on bank debt issues in these markets.
Even in securitisation markets where the top flight securities for all issuers, big bank or small, are all rated AAA, there is usually more than a 5 basis point disparity in favour of the major banks – even though all securities carry the same credit rating.
Fairfax reports there is little sympathy for the ABA and the big banks in Parliament, so the measure, if proposed, will pass through both houses.
You can read more here.
Disclaimer: Greg McKenna has worked in banking and finance since the mid 1980s. He is a former treasurer at Newcastle Permanent Building Society, is currently a director of Police Bank, and has worked at both Westpac and NAB.