The Australian government is introducing a huge new tax that targets the four major banks – Westpac, the Commonwealth Bank, ANZ and NAB – plus Macquarie, the nation’s other major lender.
The levy is ruthlessly designed to only apply to these major players, skimming their balance sheets on a quarterly basis. It does this by only applying to authorised deposit-taking institutions (or ADIs) with liabilities of at least $100 billion.
And – surprise! – that’s the big four, plus Macquarie.
Going back to basics: the core way banks make money is by raising funds at a certain cost and then lending it on to customers at a slightly higher cost. That’s the interest rate you pay on your loan.
A higher cost of funds borrowed means that protecting their profit typically means raising the cost of their products by charging a higher interest rate.
This is the oft-cited “higher cost of funding” explanation offered by banks when they increase the interest rates on different classes of mortgages — something we’ve seen a lot of this year. As rates increase, they become less competitive so in order to keep their customers, banks have to suck some of that up by returning less profit.
Essentially, the smaller banks not having to pay the levy means they should find it somewhat easier to offer competitive prices in the market.
But it also has a secondary effect: it should tap the brakes on the growth of the funding base that the banks take on, crimping their appetite to keep expanding their funding base, and dissuading them from taking on riskier types of debt. Or, more simply, it makes it harder for them to grow aggressively, which is one of the outcomes the government is looking for.
This tax is very similar to Britain’s bank levy, introduced after the GFC. Here’s what we know about the Australian version:
- It kicks in from 1 July this year. This means there’ll be a scramble at the banks to get ready for it and figure out compliance and management strategies.
- The levy will be calculated quarterly at 0.015% of an ADI’s licensed entity liabilities, giving an annual rate of 0.06%. The projected revenue benefit to the budget is over a billion dollars a year.
- The levy applies to: corporate bonds, commercial paper, certificates of deposit, and Tier 2 capital instruments.
- It doesn’t apply to: Tier 1 capital, people’s deposits, businesses and other insured deposits.
The introduction of the levy will be accompanied by further regulatory oversight, with the ACCC conducting a “mortgage pricing inquiry” for the next 12 months.
“As part of this inquiry, the ACCC will be able to require relevant ADIs to explain changes or proposed changes to residential mortgage pricing, including changes to fees, charges, or interest rates by those ADIs,” according to the budget papers.
Essentially, this is to try and dissuade the banks from passing on the costs of the levy directly on to consumers.
Bank funding mixes are highly complex, however, and we can be sure that the banks will be looking for way to reduce their exposure by moving liabilities around on the balance sheet.
“That’s what bankers do,” said one banking industry source. “They look at black-letter law and know how to move things around — looking over the fence and under the fence and figuring out what’s the best way through.”
But other budget measures — such as the extraordinary move to enforce registration of senior bank executives and directors — have sent a strong signal to the banks that they are now in a new environment of accountability. Getting clever is not likely to be taken lightly.
More budget coverage:
- BUDGET 2017: WHAT YOU NEED TO KNOW
- NEW TAX, BONUSES HELD FOR YEARS: Australia’s top bankers are the budget’s biggest losers
- A new visa will let citizens bring their foreign-born parents to Australia for up to 5 years
- How the 2017 budget will affect millennials who like smashed avocado toast
- People who smoke ‘rollies’ because they think it’s cheaper are about to be taxed the same amount as packet cigarettes