REPORT: The budget will slug Australia's major banks with a new tax on their institutional lending

Photo: Cameron Spencer/ Getty Images.

Australia’s four major banks will be hit in the federal budget with a new levy on lending between their institutional divisions, according to a report on Sky News Business.

Sky reported the tax was designed to avoid the perception that the levy acted as a kind of deposit tax that would affect retail investors and business depositors.

Treasurer Scott Morrison signalled earlier today that the budget would target the major banks on a range of measures, announcing a Productivity Commission inquiry into competition in the financial services sector.

There are limited details on the proposal and the Treasurer’s office declined to comment. Here’s the clip from Sky:

https://twitter.com/SkyBusiness/status/861506277414846464

The institutional divisions of the major banks are significant businesses, although smaller than the core retail services and business lending divisions. The Commonwealth Bank’s institutional arm, for example, turned in a cash profit of $1.1 billion last year, compared to $4.4 billion for the retail services arm.

The increasing capitalisation requirements under global and domestic banking rules mean that Australian lenders are required to hold increasing amounts of capital.

A banking industry source explained that one of the ways the banks meet those capital requirements is by lending to each other. Naturally, the result of a more constrained lending environment would be smaller capital holdings and therefore smaller loan books – and smaller banks.

As we reported this morning, the major banks have just turned in a combined underlying cash profit of $15.63 billion in the first six months of their financial years, an average rise of 6.25% in an increasingly competitive environment.

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