The Customer Owned Banking Association (COBA) is the industry body for around 100 mutual banks, building societies and credit unions. In its second round submission to the Murray Inquiry, COBA highlights the amount of subsidy they believe big banks earn as a result of their too-big-to-fail status.
Citing IMF research from the April 2014 Global Financial Stability paper, which estimated the “implicit funding subsidy received by systemically important banks” in the US, UK and Japan, as a guide, COBA commissioned research firm Macroeconomics to assess the “magnitude of the subsidy” in Australia.
They find that:
…the result that the annual average value of the subsidy to the four major banks provided by the perception that they are TBTF is between $2.9 billion and $4.5 billion.This is based on findings that the implicit guarantee provides a funding cost benefit of between 22 and 34 basis points to the major banks.
One of the key points the Murray Inquiry highlighted in its interim report was a desire to move the market toward what it called “competitive neutrality”. This appears to be a position which appears to recognise the size of the majors and the market dominance but which also empowers and enables smaller institutions to compete on some level with the dominant players.
On that note, COBA says: “Major banks already have a significant cost of funding advantage over smaller competitors due to factors such as their size, asset base and risk-management capacity. The additional funding cost advantage of an implicit guarantee provided at no cost by Australian taxpayers gives the major banks an even more powerful market position.”
COBA suggests that the majors pay a levy – really a tax – but that doesn’t appear to fit with the overarching tone of the Murray interim report which seems to seek to empower smaller players rather than punish the dominant players.
Smaller Australian banks, building societies and credit unions will await the final report of the inquiry with keen interest.
Disclaimer: Greg McKenna is a Director of Police Bank a customer owned bank and member of COBA.
You can find the full COBA submission here
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