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:

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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