What will happen with the bank levy?

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[This extract from the weekly newsletter is included here to facilitate readers commenting on the likely consequences of the bank levy].

I’ve been a member of the Pricing Committees of three Australian banks. Over the years, meetings became increasingly complex as pricing factored in higher capital and liquidity requirements (for example, CBA holds an incredible $155 billion of high quality liquid assets), funding mismatches, competitive forces, product margins and, somewhere in the mix, community backlash and politics. Into the hundreds of pages of material produced each week will now go a new cost for five of the banks: the 0.06% levy on certain liabilities.

It’s nonsense for Treasurer Scott Morrison to tell the banks to ‘absorb’ the tax. There are only two places the vast majority of the cost can go: higher product prices or lower profits (and dividends). In the complexity of pricing with so many inputs, there will be no way to identify the levy as causing a specific change. It may drive different funding techniques, such as moving assets into securitisation vehicles financed off balance sheet. The five banks will look at products and fees where pricing power is strongest and demand inelastic, but it will not be confined to home mortgages. The majority of these loans are now broker-originated and the majors do not have the field to themselves. The impact will be across a range of margins and fees to minimise the impact on profits and dividends.

The banks have little chance of convincing the government to drop it, although all major CEOs will try. Shayne Elliott of ANZ told the Australian Shareholders’ Association Conference this week that banks must explain that the levy is a tax on shareholders. The banks risk a backfiring as 70% of the public support the tax, and no government will drop a revenue source that is so popular.

banks levy

The public sees it as a fee for bad behaviour, and as Elliott said, the banks have to ask how they allowed themselves to reach this position (not enough has changed since I wrote the book, Naked Among Cannibals, in 2001). The Australian Bankers’ Association is divided because some of its smaller members benefit from the change, and Bendigo’s Mike Hirst is ABA’s Deputy Chairman.

Scott Morrison has not justified the levy in any terms beyond the banks’ ability to pay and the need for budget repair. It’s a reminder of the infamous reply from bank robber, Willie Sutton, when asked why he robs banks, he said, “Because that’s where the money is.” (although in a 1976 book, he denied saying it).

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67 Responses to What will happen with the bank levy?

  1. Gary M May 18, 2017 at 11:19 AM #

    Both CBA and NAB have already said they will protect shareholder dividends and the impact will go into higher margins.

  2. Peter Turnbull May 18, 2017 at 12:09 PM #

    As a self-funded retiree holding shares in all four ‘Big banks’ from which i derive much of my income i am concerned at the possibility of lower dividends which will mean a decreased personal income. In addition i hold shares in LIC’s Argo Investments, AFIC, Milton Investments, BKI Investments which are heavily weighted in bank shares from which they derive income which is passed on to shareholders in those companies. All Super Funds, private and other have invested heavily in Bank shares so face the possibliity of reduced income. Lastly Governments should not rely on Private Industry to cover their own folly of overspending. Peter Turnbull

    • Mark Lewin May 18, 2017 at 2:05 PM #

      As a financial planner of 22 years, I have seen the banks so called “planners” cause havoc to the reputation of our industry. Along the way, the banks made huge profits out of their customers “buying” bank products. Peter, the dividends that you have enjoyed have been paid from these profits. Sorry, but my sympathy goes to the retirees who sat in front of a particular sub-set of bank planners (there are some excellent planners at banks) who now have a lower standard of living as a result. The banks started this and now it is catching up with them. Please don’t place all of the blame on the government.

      • Nick May 18, 2017 at 3:53 PM #

        If the levy is about compensating victims of bad investment advice then all the government needs to do is say so. But the government is being explicit in saying that the levy is being used for budget repair. How does that help the retirees you have sympathy for?

      • PETER TURNBULL May 18, 2017 at 5:06 PM #

        Hi Mark Having spent 1964 as a researcher in a large London Broking firm , been involved on the Trading Floor during the Western Mining / Poseidon boom -bust and looking after people’s finances until retirement in 2005 i can only say that in my opinion most so-called Financial Planners are more like Commission Agents for the firms they work for so you are probably correct in your assessment.

    • peter c May 25, 2017 at 4:22 PM #

      Peter Turnbull, looks to me like you have a problem of lack of diversity. You should not rely on bank shares for such a high proportion of your income, and you may have too muck risk for your l.life stage. Bank shares, directly or indirectly should be no more than about 15% of your investing assets.

      I too have bank shares but below 15%.

      Perhaps you should consider, other lower risk avenues to obtain some of your income, such as the better corporate bonds out there. .

      • PETER TURNBULL May 25, 2017 at 5:06 PM #

        Peter C I have no problem with diversity considering banks , BHP , RIO , WES WPL make up 65% of the Australian market One has to consider that LIC’s such as Argo , Milton , AFIC , BKI Investments are all heavily weighted to bank shares from whic they receive dividends which they pass on to shareholders so for a retiree there is little choice to boost income Of course investment in HSBC , Wells Fargo , Clydesdale Yorkshire Bank are alternatives and provide o’seas balance albeit still in bank shares I have no argument against having up to 50% of a balances portfolio in the above-named shares Australian and overseas Peter Turnbull

      • Bob Goodwin May 27, 2017 at 9:59 AM #

        Aren’t most of the Corporate Bonds/Hybrids issued by the Banks so your eggs are still in the same basket/

  3. Janet Nguyen May 18, 2017 at 12:09 PM #

    Like any business that needs to maintain its profitability, costs are passed on to the users of that business. In the case of banks, that would be the borrowers. The option for the banks is to absorb that cost increase and the returns would be lower for their shareholders.
    Of course there are some shareholders who are also borrowers. Either way, they would be wearing the cost.

  4. Kathy Gall May 18, 2017 at 12:24 PM #

    There is another way the 5 big banks could pay for or partly pay for the levy – through the reduction of senior management and executive salaries. The CEO of Macquarie Bank currently receives $16.5 million, the CBA CEO – $12.3 million and so on. Commentators who are against the levy do not have a problem with seeing a percentage of bank profits going to senior employees in this fashion but object to the Australian taxpayer receiving any of it, even if it partly compensates for the current protection provided by the government.

    The banks obviously see themselves as a protected species – fully able to capitalise on the gains during the good years and seek government protection and support during the bad years.

    • Rob May 18, 2017 at 1:30 PM #

      That is just a cheap, “tall poppy” shot, Kathy.
      Are you serious? I don’t think even halving a Bank CEO salary/bonus of $16m is really going to go very far when trying to cover a bill of circa $500m per bank, is it???

      • Chris May 18, 2017 at 2:25 PM #

        It’s not a cheap shot, Rob. If the hundreds of executives across all 5 banks were to take a decent haircut, then that would make a significant difference. Given all the dirty deeds done by banks over the last few decades, that would be the most prudent way in which banks can start to regain public trust.

        It needs a helluva lot more than that to undo all the bad but it would be a good start.

      • grant jagelman May 18, 2017 at 2:46 PM #

        The banks are frequently unaccountable, faceless, arrogant, inefficient, and morally bankrupt.
        In certain circumstances they will be bailed out by the government and they enjoy a priviledged position not shared by any other private orporations.
        if they addressed their operational and management issues it should offset the tax properly now being levied by the government. The bloated salaries are only one of many matters that need addressing.

    • Graeme Bennett May 25, 2017 at 2:21 PM #

      There are severe financial consequences arising from tearing up contracts of employment Kathy, Chris and Grant. You pretend to ignore these. No doubt your view on the rule of law would change if your employers arbitrarily halved your agreed remuneration because a government was incapable of balancing its books.

      • peter c May 25, 2017 at 4:31 PM #

        Graeme Bennett, you can do it at the end of their contact period, not during. For whats it’s worth I think all senior executives should be paid about the same as a Prime Minister.’s overall package.

        Reducing their salaries at the end of their contract period will make a difference and save money, but certainly will not cover the increased cost of the levy

        The fairest way to pay the levy is to share the cost between shareholders, executive salaries, depositors and borrowers. We should all pay our share.

      • Graeme Bennett May 25, 2017 at 5:14 PM #

        Hi Peter. The market for CEOs is international. Whether we can justify those salary packages or not (I can’t TBH) you will restrict the choices of boards if you restrict the packages they can offer. Whether that would make a big difference to the performance of those banks I do not know. It would likely make the Bob Josses of the world (and Frank Blount for Telstra) unavailable at a time when banks might require a change agent. I believe that would be a mistake.

        As I have said in one of the other posts (so many, sorry) if you want fairness adjust the progressive tax scales so that the impact is across the board. This is just a sneaky way of avoiding the political pain of being blamed for tax rises. My suspicion, unburdened by actual evidence, is that this bank levy will prove regressive in many instances, the opposite of fair.

    • SMSF Trustee May 25, 2017 at 9:43 PM #

      The banks did not seek government protection, let’s get that misconception out of the way. It was required because in 2008 every other western government guaranteed their bank deposits and, since ours fund globally (because there isn’t enough savings in Australia to fund the demand for home loans from Australians) they had to be in a competitive position or they would have faced liquidity and solvency problems. The Government chose to grant a much greater degree of protection than many thought prudent, including the RBA which advised the government to go for a smaller maximum deposit size than they did at the time.

  5. Alan May 18, 2017 at 12:31 PM #

    The govt has realised that as it hasn’t the balls to increase the GST that taxing the big banks will do the same – a “broad” impost that the banks will spread over the economy – on borrowers / lenders and maybe even the shareholders. As the govt will not wear the odium expect this to increase over time (probably being extended to first the foreign banks and then the smaller fry).

  6. Phil May 18, 2017 at 12:45 PM #

    Yes, the idea of banks “absorbing” the tax doesn’t really mean anything. Ultimately the tax gets paid by some combination of customers, shareholders and staff. Of the “big five” banks, I’m a customer of two, a shareholder in four and a staff member of one. So, on a purely selfish basis I’m not a big fan of the whole thing. But aside from that, this is a very suspect policy direction to start heading down. Once we start hand-picking companies that politicians or the public believe to be “evil” or “too profitable” or “too lucky” (remember the mining tax idea during the last resources boom) and taxing them more than the others, it opens up all sorts of ugly possibilities. In any case, I always thought cutting expenses was better than increasing taxes, especially as the latter tends to often have the effect of ultimately reducing tax revenue rather than increasing it.

  7. Kevin May 18, 2017 at 12:54 PM #

    The levy will be introduced and it is likely to be increased in the future. It will be too tempting for future governments not to increase this “Big New Tax”. However, I am more interested in how Boards and Managers will face the dilemma of declaring a profit next year. If they declare a new record high profit they will face criticism for passing on all the new tax and more and invite an increase in the tax. If they declare a lower profit they risk lower dividends, a fall in the share price and lower management bonuses. What will they do and how will they disguise another record profit?

  8. Peter May 18, 2017 at 1:27 PM #

    The banks have messed up big time with Insurance and super, so only have themselves to blame for poor public support. Add to this similar taxes in other countries and they cannot hope to win any argument in the public arena. The cost will be passed on by increasing or maintaining margins on inelastic products and maybe some cost reductions or flat dividends. Bigger issue is how they do this when APRA is increasing the regulation and restricting home loan growth. I have no doubt the banks will do whatever they can to maintain cash profit growth.

    • Graeme Bennett May 25, 2017 at 2:26 PM #

      If they had the best performing insurance and super products in the market this government by populism would still be levying the same tax. You don’t like the big banks? Fair enough. Take your business elsewhere. They don’t own their customers. No one is forced to deal with them.

      How would you treat your responsibilities to your shareholders?

  9. James May 18, 2017 at 1:41 PM #

    For a long, long time the Big Four have been deemed, “Too big to fail.” They have benefited from this with better credit ratings which in turn means they have access to cheaper cost of funds in the wholesale market. This in turn erodes the competitive landscape for the consumer. Even the RBA has estimated this benefit to the Big Four at $3.8B annually! Estimate that they will pay around $6B over the next four years, means they will still come out in front. Tax isn’t big enough and will hopefully give the consumer more of a choice when it comes to financiers.

  10. allan May 18, 2017 at 1:43 PM #

    What the banks, business organisations and super funds need to do is to explain the capitalist model to people. In the new world the banks have become living entities rather than a business model. Narev and others are not the bank, the shareholders are; the biggest shareholders are the big union super funds. Increase taxes hurt your own returns!

    People seem to think that by taxing the banks they are getting revenge on the big end of town whereas in fact they are all, indirectly, the bank. If they want to make changes they need to do it as shareholders.

    Example of this line of thinking: I was at Office Works buying a printer and the one I wanted was overpriced so I googled what price I could get it at and told the employee what that amount was. He advised me that they would match it and take off a further 10%. He said that Office Works, his employer owed it to me. I replied that I wanted a fair price and not to get it so cheaply that Office Works would lose money as that would put jobs in jeopardy, including his.
    His response after my explanation was it was only fair that I got the lowest price. I could not convince him that OW needed to make money to keep him employee, keep the store open etc. That unfortunately is the new order thinking.

    • Ian May 18, 2017 at 4:27 PM #

      I agree. I cannot believe the naive comments of our media. It seems they think the banks have a vault somewhere with the $6B stored. Ultimately the public will wear the cost as either a borrower, a depositor, member of staff or a shareholder. The only avenue for the banks to recoup the costs without impacting their stakeholders is to increase their charges on services they provide to government. Start with the ABC!!!

  11. Graeme May 18, 2017 at 2:56 PM #

    Always been fascinated by the fact that the only Australian businesses with a government guarantee never to fail are the major money shufflers. Not only too big to fail, but apparently they have been able to maximise profits to the point that many here feel a cut in dividends will jeopardize the countries retirement system. Obviously needs fixing.

    Unfortunately the treasurer has made a mess of it. He should have calculated how much the banks were making from the guarantee and phased in hitting them for the full amount, while carefully explaining to the public that they could go elsewhere (and probably save a bundle in fees while they’re at it). Bank shareholders may even have to give back part of their previous windfall.

    And as far as fixing budget deficits, he should have first made the huge transfer pricing and non-market rate inter-company lending multi-nationals pay some tax, as well as correcting the Howard era blunders in capital gain and superannuation taxing. Yeah, I know this isn’t going to happen. It would require tough action, something that is apparently reserved for Centrelink customers.

    • Nick May 18, 2017 at 6:32 PM #

      What is the community getting from the implied government guarantee? On their own, the banks cannot possibly prevent the effects of a financial crisis – not of their own making – that would leave about 900,000 additional people unemployed. An implied government guarantee can help. And I repeat, it’s an implied guarantee; pay for it and then it becomes an explicit guarantee that needs to be defined in full. The Financial Systems Inquiry recommended that banks’ capital reserves be increased so that banks are perceived as unquestionably strong whereby, in the event of a crisis, losses are borne by shareholders and banks and bank recapitalisation can be quickly undertaken. This reduces the risk of a wholesale breakdown of the financial system, keeps taxpayer liabilities to an absolute minimum and mitigates the perception of an implied government guarantee. Banks should be, and should be seen to be unquestionably strong, however it’s not the banks’ job to save the Australian financial system from external forces beyond their control.

  12. Vaughan May 18, 2017 at 2:57 PM #

    One of the few tax increases that will be paid by the wealthy, instead of the not so wealthy.
    Which is totally at odds with the rest of the budget.

    It is interesting that Scott Morrison says the banks should adsorb it. It suggests that he thinks the average Australian is even dumber than I think Scott is.

    I do however think it is dangerous to charge banks what is a very small fee for the fact the Australian government will support them. When did we agree to support them?? What if we don’t want to? Miss-pricing risk should be its own reward.

    • Graeme Bennett May 25, 2017 at 2:48 PM #

      Owners of bank shares and bank customers are not uniformly wealthy obviously enough. If you have superannuation with share market exposure you will almost certainly be an indirect bank shareholder. Does that make you wealthy? I am starting to agree with you on Scott Morrison but the ultimate impact of this tax will be random. My guess is self-funded retirees will have a greater exposure to bank shares than wealthier people due to their need for income. If that is the case the bank tax is regressive, the opposite of fair. Fair would be an increase in taxes across the board, the reversal of some of Howard’s (and Rudd’s) tax cuts with the higher tax brackets taking a bigger hit (but bearing in mind that they have already been taking the biggest hit since the RGRAT governments came to town).

      Governments have a choice in a financial crisis. We have seen what happened in the States when the government abandoned one medium-sized bank. Politics being what they are our government would be on the hook to guarantee deposits held by a failing bank whether they saved the bank or not. If the government had to administer those liabilities through a liquidation you can imagine what the mess would be like.

      If it cheers you up bank shareholders will be screwed over bank guarantee or not, The bank levy makes a joke of the requirement that banks’ balance sheets be unquestionably strong.

      We are being played for fools by dishonest politicians left and right. They don’t care that the banks slip their hands into our back pockets to extract this tax for the government, they just want to increase taxes without the politicians being blamed for it. Hence all the BS about banks absorbing costs, as if they were somehow unconnected to their stakeholders.

      All the noise is about making dishonest politicians more careful about raising the tax to cover future profligacy I suspect. It will go through and I will vote informally until it is removed.

  13. Tim May 18, 2017 at 3:01 PM #

    When I started in the city the banks had PE’s of around 8, while a other good industrial companies had PE’s of around 14. Back then banks were priced for the highly levered vehicles they are.

    As Banks became protected species they paid higher divs and thus were priced with PEs much closer to the market average

    So what I am saying is that the “premium” that banks trade on (to their historical status) is a relatively recent phenomenon. Baby boomers and retirees from the SMSF era naturally think that bank divs are a “god-given”, but a fair bit of this relates to their monopolistic characteristics

    • Graeme Bennett May 25, 2017 at 3:03 PM #

      Really? Capital requirements are much greater now. That new capital can only be invested in assets paying a very low return. There was a lot of consolidation in the banking industry and a lot of work done to bring down costs. Obviously dividends took a big hit after the GFC.

      What monopoly? Foreign banks can come in and compete with few restrictions. Small banks can do the hard work of consolidating and cutting costs if they want rather than expect to be featherbedded by the government and given a free run to increase their earnings (much more likely than competing for a bigger market share I think).

      How do you reckon giving the foreign banks and smaller local banks a leg up at the expense of local shareholders is a good thing? Don’t let envy and pettiness cloud your thinking.

  14. Jonathan Hoyle May 18, 2017 at 3:35 PM #

    There is a perfectly rational economic case for a bank levy. It’s the monetisation of the implicit sovereign guarantee provided to the banks by the government. This lowers their cost of borrowing in the capital markets and is a quantifiable amount.

    If ScoMo had phrased it thus, he would have a case. However, we all know he’s targeted the banks merely because he can.

    • Graeme Bennett May 25, 2017 at 3:05 PM #

      Why would unquestionably strong banks require a government guarantee? What would be the appropriate levy for a guarantee that will never be called on? Would the guarantee preserve depositors’ wealth or shareholders’ wealth?

  15. Geoff May 18, 2017 at 3:51 PM #

    Rather than this levy, it would be fairer just to tax the banks at a higher company rate – say 35% rather than 30%. They would then pay their dividends franked at 35% rather than 30% so the average shareholder (and that is nearly all of us!) would be no worse off.

    In fact, why stop at the banks? Rather than talk of cutting company tax by 5% to 25% why not instead put it up 5% to 35% for ALL companies?

    But thinking about it, why stop there? Let’s make the company rate the same as the top personal rate. “But we won’t be competitive!” I hear some cry. OK so we abolish the top personal tax bracket and make company tax 39% which equates to 37% + 2% medicare levy that the second top bracket (87k-180k) currently pays. Paul Keating would be happy that no-one need pay more than 39% and furthermore fully franked dividends would never require the shareholder to “top up” the tax paid, and so there would be little incentive to keep money in companies that would be better distributed as dividends.

  16. Kim McDonald May 18, 2017 at 3:55 PM #

    The banks concerned are the only commercial enterprises in Australia that I am aware of who have their balance sheets effectively underwritten by the Federal government….ie the taxpayers.
    As one of those taxpayers I have to admit that I don’t struggle with the proposition that the government is justified in extracting a premium for that underwriting facility, and in a fashion that is not applicable to other corporations that do not enjoy the same facility.
    However I would have a problem if a similar impost was placed on other corporations without a corresponding justification.

  17. Mal Hutton May 18, 2017 at 4:28 PM #

    Salaries are excessive in most financial institutions because ‘that’s where the money is’ (whoever said it. There are many professions where the skills required are greater than working in a financial institution but the remuneration is much less. And I worked in both fields to find this out.

  18. Sue Agnew May 18, 2017 at 4:43 PM #

    I can’t understand why the Government proposes on one hand that lowering company tax will create “Jobs and Growth” but imposing a levy won’t be a net negative for the economy??

    I am not impressed by the highway man tactics employed. Mr Morrison’s delight in pointing out that the Bank’s are a soft target is very immature. This reduces the community’s confidence in investing in the ASX and our own businesses – talk about the dead hand of government – who will be next?

    Retirees need to find income to survive for the years beyond their working lives. The Government should be considering how to facilitate adequate returns in a low volatility environment – this will reduce the reliance on the age pension and give average income earners dignity in retirement, without them needing to accumulate $1.6m each! The Government is feeding retirees into the maw of speculators and fraudsters as they raid the Bank’s themselves.

    How about the Government create a guaranteed investment where Australian self-funded retirees could safely investment their retirement savings and this money could be used to fund social housing and low interest loans to first home buyers (after a rigorous appraisal of their borrowing capacity)? That would be a win/win and would eventually reduce the welfare costs. Is anyone looking beyond the next election?

  19. Wayne May 18, 2017 at 5:31 PM #

    I would love to be a fly on the wall when the legislation on the new tax on wholesale funding is drafted. Interbank deposits (instead of wholesale like CP and PNs) could rear its ugly head again. More importantly, securitisation should take off like a Saturn 5 rocket. Banks will hollow-out their wholesale books like they do with mortgages, because they are unlikely to be taxed on assets which have been sold and therefore don’t need funding.

  20. Ex banker May 18, 2017 at 5:35 PM #

    The two major parties are intent on marching backwards into the 1950s.
    It’s not just the new tax on a few large corporate taxpayers, it’s the raft of new rules and regulations-attempts at market controlling by bureaucrats.
    The licensing of senior execs behaviour is laughable if it wasn’t so serious.
    You can see political witch hunts every time there is bad loan or a complaint by some spiv trying to recover his leveraged exposure.
    I think the outlook for bank stocks here is pretty poor- I am thinking of selling some of my CBA shares , even after the sell-down of late.
    How the banks respond should be on the cost side-signal that if costs can’t be recovered through margins,start sacking staff and close branches and make it clear that this is the only option that Canberra has left open.
    And Shorten wants to increase taxes more !
    I glad my banking career is behind me.

    • Wayne May 18, 2017 at 5:37 PM #

      The banks aren’t gonna beat Canberra on this, and the real risk is that those idiots will hike it 4 more times to match what the Brits have done (regardless of the lack of justification). We could wax all day about the abysmal failings of our ex-brethren in addressing community concerns, fake news about guarantees or the real hikes in their own pay packets, but my thoughts are more with the practical limitations. For example,

      The latest Basel framework and APRA belts+braces+ropes require the banks to hold massive amounts of surplus liquids. CBA typically holds $139 billion on a banking balance sheet of circa $700 bn, funded primarily from wholesale sources. That cost just went up 1/16th and dilutes RoE (which means less capital generation)
      Aussie banks now have no level playing field on corporate bilateral and syndicated loans, because foreign banks have a 1/16th cost advantage regardless of how they fund. Lower bilateral lending puts downstream value-add tied business at risk, such as Trade Finance, FX, Swaps, Commodities hedging, Underwriting Fees and so forth. Standby lines will be a thing of the past, unless banks can pass on the cost and still remain competitive with big foreign banks.

      • Ex banker May 18, 2017 at 5:43 PM #

        Wayne has raised a number of important market related aspects that have also not been raised by the so-called economic journalists. Re the GFC crunch, my understanding was that after several days of unsuccessfully trying to issue paper in NY, (at the time US banks were refusing to lend inter-bank to each other and also declining AAA foreign banks as well ), Ralph Norris at CBA began talking to RBA Governor Glenn Stevens that we had every chance of a total meltdown of the system.

        The main aspect of this fear was that the main originators of the mortgage securities (the major US investment and commercial banks had on sold huge portions of them as AAA credits but which were now junk when the US housing market began collapsing) the sellers feared the holders of these securities (who was actually holding this junk was not known) may have been intent on selling back or because of the massive paper losses they could have been sitting on may not have been able to pay back even interbank debt. So they refused to lend interbank to virtually everyone.

        There was a barrage of phone conversations, including Kevin Rudd talking regularly and directly with the bank CEOs.

        At around this time the meltdown was on in earnest around the globe. The Irish banks were verging on total collapse when the Irish government was the first to directly intervene by guaranteeing their banks’ liabilities, quickly followed by other countries.

        I recall Ralph Norris saying that banks owed a huge debt to Glenn Stevens for being proactive both in OZ but also internationally.

        After APRA had lined the government up to guarantee local bank liabilities (but not immediately saying anything about charging for it, they eventually got around to apply a fee of 70 bps I think).the RBNZ introduced a similar arrangement.
        Once the guarantees had been announced, the liquidity of the Commercial Paper market was re-established and the system started working again.
        Later, the extent of actual losses led to governments in several countries having to inject capital into the banks to maintain solvency. (Which have to be paid back one way or another).
        Australia’s majors are now being taxed for successfully avoiding capital losses – the guarantee was needed to ensure international markets maintained liquidity, not to prop up the Australian banks capital ratios or support depositors.The final cost of the guarantee fee to the banks was about $700m.

  21. noddy May 18, 2017 at 6:40 PM #

    for many years i was both a customer and investor in the big 4. i understood that being a customer of a bank protected by the 4 pillars policy meant that i was effectively being gouged on mortgage interest rates for the “benefit” of living in a country with a semi-protected banking industry. i owned bank shares and enjoyed the high dividends and figured that owning the banks kind of counter-balanced getting shafted by them.

    fast forward a few years and i now do my banking outside the top 4 and have sold my bank shares for a number of reasons. i see the tax as a form of payback for the priveleged position that the big 4 have been handed for decades and that they have enjoyed as it empowered them to become 4 of the largest banks in the world. i understand that this is not a unique tax and exists in other countries. so i read and understand the arguments about the tax being passed on to customers and shareholders but nobody is forcing us to be either.

    • Graeme Bennett May 25, 2017 at 3:57 PM #

      In the US and the UK there is some justification for the tax in light of the government having to intervene in saving banks over there in stumping up fresh off the printer money to bail out their banks. Our banks were never in that position, thanks to their own prudence and the actions of APRA.

      One way or another the tax will impact on consumers and taxpayers. Odds are your smaller bank will use the tax to increase their earnings (at your expense) rather than compete for a bigger market share, using the majors’ price leadership as cover. Schadenfreude has its costs as well as its pleasures.

  22. Garry M May 18, 2017 at 8:45 PM #

    Much of the discussion as to the justification for the introduction of the tax seems to revolve around the funding benefit that arises from the government “guarantee” of the Australian banks.
    As one of the few who has actually read the Banking Act,people should understand that nowhere in the Act is any reference to a Lender of Last Resort facility or indeed any reference to guarantees of bank liabilities.(There are sections about options available revolving around wind-up,appointment of administrators etc
    Indeed one of the central thrusts of earlier banking enquiries was considerable thought given to distancing banks from recourse to the public purse in the event of the possible insolvency of an Australian bank.
    A raft of prudential frameworks focussing on diversification of funding and loan concentrations,stronger capital adequacy and liquidity ratios were introduced – and in hindsight did much to help Australian banks weather the GFC.
    Further attention was given to these issues post the GFC.
    We now have the strange situation where the threat to the public purse of a banking failure has in practice been lowered but where moral hazard has been significantly increased by Canberra and the regulator APRA intruding in the day-to-day operations of banks and imposing a tax as a charge for the implicit support that Canberra (now)claims it gives banks.
    The actual revenue raised by this tax is insignificant but assuming the scramble for ever more tax persists, the levy will be increased in time, and the more politicians talk about the existence of this implicit guarantee , the implicit effectively becomes explicit.
    The end result? H
    The taxpayer has unknowingly/unwittingly become the owner of a very large future actual,not contingent,liability.
    If you look at the history of banks in Australia,no federal (as opposed to state)taxpayer has ever had to cough up for a bank failure,notwithstanding the panic of many,including politicians,over time .
    My view is that record has been set up to fall.

  23. Ray Farley May 18, 2017 at 9:33 PM #

    Fascinating discussion. Thanks guys. I’ve thought for a while that the banks are on such a good wicket that they would soon charge us for scuffing their carpet and breathing their air every time we enter a branch.
    The thing Morrison said that I did like is that whenever there is a cost rise for us poor wage earners – bank fees, electricity, gas, chocolate – we just have to suck it up because there’s no-one to pass it onto. I can’t see why that shouldn’t be the same for the banks. Even when I ran a retail store, competition was such that I couldn’t pass on increased costs. I just had to sell more product.

  24. Ron May 19, 2017 at 12:05 AM #

    . . . . if the tax is a penalty imposed on misbehaving banks (and there is plenty of evidence on this with no contriteness emanating from the banks), then surely it should be absorbed out of the obscenely high and totally unwarranted remuneration paid to bank senior executives who are responsible for this bad behaviour . . . .

    • Vaughan May 19, 2017 at 1:36 PM #

      Not to mentioned mainly shouldered by CBA.

  25. Bob Goodwin May 19, 2017 at 6:34 AM #

    This is nothing more than a tax increase for a very select group of businesses and Morrison may say one thing but he knows it will be passed on one way or the other.His pleas for them to absorb the tax is purely to get public support and is grandstanding. We all potentially will pay the price for a Government that can’t balance its budget

  26. Mike Nay May 19, 2017 at 11:22 AM #

    Have a read of Ian Verrender’s article in ABC News from last Monday (“Federal budget 2017: Why Scott Morrison’s bank levy doesn’t go far enough”). He has summed it up perfectly in my opinion!

    (Hint: Highlight and copy the link below, then paste it in to the address bar of your browser.)

    http://www.abc.net.au/news/story-streams/federal-budget-2017/2017-05-15/why-scott-morrisons-bank-levy-doesnt-go-far-enough/8525620

  27. Lisa May 19, 2017 at 1:55 PM #

    this is a fee for paying for the Royal Commission to be avoided. The loss of political respect from the masses for the Govt protecting the banks needs to be bought back. Probably still cheaper as the banks should just pass it onto shareholders as it is a new cost of doing business, and equity holders are the ones who get the dividends after all costs. If the Govt argue they are massively profitable then take the profit …. must come out of reduced dividends, as the bank will have to keep up their same level of retained earnings for reinvesting/acquisitions

    • Graeme Bennett May 25, 2017 at 3:41 PM #

      I doubt it Lisa. This is a tax on bank shareholders and customers paying for the Government’s inability to get its budget measures through the crossbench for mine. Anything else is a pretence. A larger draw on retained earnings is to build up capital reserves to meet APRA’s requirements for the banks to be unquestionably strong. The banks are still waiting on Mr Byers for those requirements…..

  28. Graham Hand May 22, 2017 at 2:09 PM #

    Interesting quantification by Westpac:

    The gross impact of the levy could be around $370 million a year, it expects that the after-tax impact will be a net $260 million a year — equal to 8 cents a share in dividends, or 4.3% of its last full-year dividend of $1.88.

    The details were contained in a letter from chairman Lindsay Maxsted to the bank’s more than 600,000 shareholders.

    “On an annualised basis, that represents a cost of around $370 million or around $260 million after tax. The exact cost will depend on the final form of the new legislation passed and the composition of Westpac’s liabilities. No company can simply ‘absorb’ a new tax, so consideration is being given to how we will manage this significant impost on the bank. We plan to consult with stakeholders, including shareholders, on the Levy. To dimension the impact of the Levy for our shareholders, the $260 million after tax cost is equivalent to around 8 cents per share (using the above estimates). Based on Westpac’s 2016 full year dividends of 188 cents per share, this represents 4.3% of dividends paid.”

    Based on Westpac’s numbers, about $1.86 billion of the whole levy will be a tax write-off.

  29. Ron Keyhoe May 22, 2017 at 2:22 PM #

    It is a cost for the banks. It will be passed onto the bank’s clients & shareholders. It should be borne by the bank’s executives. Ron 22/5

  30. Graham Hand May 22, 2017 at 5:16 PM #

    Here comes the campaign, this letter from CBA.

    Dear shareholder,

    The recently announced Federal Budget included a new levy on the five largest financial institutions in the country.

    We have expressed serious concerns that the new levy is a poorly designed policy, done without consultation, which impacts not just on the banks but also on our shareholders and customers.

    The Commonwealth Bank paid $3.6 billion in tax in the 2016 financial year, making us Australia’s largest taxpayer.

    We have limited information on which to base our calculations, but from 1 July 2017, we estimate that the new levy for the Commonwealth Bank will be approximately $315 million per annum ($220 million after tax). This is based on the Group’s current financials and subject to any further amendments made through the parliamentary process.

    The budget announcement also included a number of other measures which potentially intrude into the operations of the banks and have significant implications for good corporate governance. For example, the fact that regulators will be empowered to override your Board calls into question the established fundamental governance framework which governs publicly listed companies.

    Commonwealth Bank has consistently returned on average 75% of profits as dividends to more than 800,000 shareholders each year. In addition, millions of Australians have also benefitted through their superannuation funds. The remainder of your company’s profits are reinvested for future growth, so that we can serve our customers better, while continuing to deliver for shareholders and the broader Australian economy.

    We are deeply concerned the new levy undermines our ability to achieve these goals.

    Last Monday, Commonwealth Bank lodged an official submission to Federal Treasury outlining our concerns about the tax. You can read our full submission by clicking here.

    Many questions and concerns have been raised regarding this new tax. We will endeavour to respond to as many questions as we can. To stay up to date with our comments, please check our CBA Newsroom site.

    Your CEO, Ian Narev, and I would like to hear your views and respond to any questions you may have on the new tax. We therefore intend to hold an interactive telephone “Town Hall” discussion for shareholders in the lead up to our Annual General Meeting in November. Details and invitations will be issued with our full year results in August.

    In the meantime, I thank you for taking the time to read about our views on the tax.

    Regards,

    Catherine Livingstone AO
    Chairman
    Commonwealth Bank of Australia

    • SMSF Trustee May 23, 2017 at 1:58 PM #

      I’m a shareholder, but have not received this. Has it only been sent to the institutional investors in the CBA? Or is it Australia Post just being slow?

      In any case, as a shareholder my main concern is not with the way they are now being treated, but the way they have behaved over the last few years which invited this sort of impost. Had banks like CBA – perhaps especially CBA – taken the ethical issues that have arisen over the past few years more seriously they would not have been the target for a special tax. So the appropriate response now should be to just suck the tax up, acknowledge it as a clear warning shot across their bows and do something to improve internal culture and commitment to their customer’s best interests. My shareholder returns will then fall out from the business they do with happy clients.

      • Graham Hand May 23, 2017 at 2:52 PM #

        I received it by email as a CBA shareholder, so not Aussie Post, but do they have your email address?

      • SMSF Trustee May 23, 2017 at 5:33 PM #

        Ah yes, I now see that it came late yesterday in the email that I use for my bank relationships.

  31. Graham Hand May 22, 2017 at 11:22 PM #

    And NAB.

    Dear shareholder,

    As one of NAB’s valued shareholders, I feel it is important you hear from me directly about the major bank tax announced in the Federal Budget on 9 May and what it will mean for NAB.

    The tax – $6.2 billion over four years – is poor public policy that will affect every Australian.

    We are concerned the tax has been developed without sufficient consultation or consideration of the impact on bank customers, shareholders, suppliers and employees – or indeed the broader economy.

    There remain many unanswered questions. But based on what the Government has announced to date, and applied to our business as it stands, the tax could cost NAB approximately $350 million annually, or $245 million post tax.

    However the actual cost will not be known until the final legislation for the tax has been passed and we can fully assess its impact on NAB’s business.

    NAB will continue to strongly object to this tax and will do so by engaging with you, the broader community and with the Government and Parliament.

    We are encouraging a Senate committee to conduct an inquiry into the legislation to enact the tax, so Australians can have a deeper understanding of the process behind the tax and how it will work.

    We have also called for the exposure draft legislation to be released for public consultation so the community can have its say. This is an important step for a reform of this scale and nature.

    Given the tax is being enacted for the purposes of budget repair, we have encouraged, through our initial public response, the inclusion of an end date for the legislation once its stated objectives have been met.

    The Government has said this tax can be simply “absorbed”. You know, I know and the Government knows that a tax cannot be “absorbed”. It must be passed on somewhere.

    No decisions have been made on how we will seek to manage the cost of this new tax. While we must balance the interests of all of our stakeholders, the options available to us are limited.

    We could reduce what we spend with our more than 1700 suppliers. Many of these are small businesses that have provided great support and service to our bank over many years. Reducing our spend on suppliers also affects our customers and shareholders.

    We could increase the rates we charge borrowers or reduce the rates we pay savers.

    We could invest less in new products, facilities and services for our 10 million customers.

    We could invest less in our workforce; all 34,000 employees, most of whom live and work in the communities they serve across Australia.

    Or we could allow this new tax to affect our profitability. This would impact our shareholders – the 570,000 people like you who own shares in the bank directly and the millions of Australians who own NAB shares through their superannuation fund.

    We will continue to advocate for you, our shareholders. You invest your savings in NAB and together with all our stakeholders are what make our company what it is today.

    The Board is interested in your views on this tax and how we can represent you. Please share any feedback or thoughts you might have by emailing [email protected]

    Thank you for your continued support.

    Yours sincerely,

    Dr Ken Henry AC
    Chairman

  32. SMSF Trustee May 23, 2017 at 2:08 PM #

    Ken Henry is right. Taxes on corporate entities can’t be absorbed, let alone this one. Company tax is passed on to consumers; payroll tax is passed on to consumers; excise taxes are passed on to consumers. In the end, all tax is paid by the individuals who make up an economy, one way or the other. This levy is no different.

    But he’s also wrong to single this one out in this way, as if it alone is passed on. Since all taxes are passed on, arguing that it will have to be passed on is a non-sequitur argument. Treasury will respond with an ‘aw dur’ type response, as its former Secretary must know only too well.

    Most of his suggestions about how it will be passed on are business nonsense. They won’t cut what they pay suppliers, which presumably are for things needed to conduct their banking business. They won’t reduce investment in new products, because fear of being the only bank to do so will prevent them giving away a competitive position. They won’t cut what they ‘invest’ in their workforce, because even when the GFC hit the banks argued that stressed times are exactly when you need to invest more in your employees.

    So in the end there will be a minuscule effect on their interest rates on both sides of the balance sheet and a minuscule effect on profits and dividends.

    So much bleating, when they should just suck it up and acknowledge that they had it coming, and commit to earning back their social licence to operate.

  33. Rick Dobosz May 23, 2017 at 7:31 PM #

    In today’s media were comments that this bank tax will be before tax [gross earnings] so this cushions it a little i suppose. The biggest concern is what happens at the end of the so called 4 years that this was promoted to end. No one would believe its over, the biggest worry is the potential for increases over time. Remember the public/media hate banks and they are a easy target…

  34. Garry M May 23, 2017 at 11:31 PM #

    I am staggered by the rating agencies belting the small banks but not the majors. A three grade rating differential is astonishing.
    The rationale seems because the implicit guarantee appears to now to have sprung into effect as a result of the new tax but does not apply to the minor banks!
    The irony is several fold.
    While it is an historical fact that small banks are riskier, it is also a fact that the taxpayer could readily afford to fully bail out one or more of the minor banks( but historically haven’t as the regulator has been able to stitch deals whereby a major has bought out the problem bank and depositors have never lost money.
    Conversely, if a major bank or banks got into trouble the taxpayer may not be able to bale it/them out due to the total extent of potential losses.
    That is,the implicit guarantee for the majors may well not be able to be called on in full.
    Conversely,if the above is wrong,or the three grade rating differential is actually based on fundamentals, the analysis must rest on the strength of the majors’ balance sheets versus what can only be a bunch of risky minors.

    • Wayne May 25, 2017 at 2:55 PM #

      You’re right to fuss about the ratings. Many years ago, Mike Katz at CBA brought in the US credit analyst group called KMV.

      KMV had developed an Expected Default Factor based on share price movements which were believed to represent all known risks for a listed enterprise. The EDF methodology was a leading indicator, vs S&P’s ambulance – chasing so keenly demonstrated in the US on Bears, Lehmans, the sub – prime sector and Collateralised Debt Obligations in 2007/8

      KMV were so good that Moody’s acquired them in 2002.

      http://www.moodysanalytics.com/About-Us/History/KMV-History

      Analysis of the share prices of the smaller Aussie banks will almost certainly justify credit ratings higher than S&P’s stab in the dark.

      As for the implicit guarantee of the majors, any bail-out would almost certainly involve more than one of them and almost certainly be beyond the funding capacity of the sovereign in the same way as PIIGS in the GFC. S&P should downgrade the sovereign due to the quantum of the contingent risk. That might make Canberra sit up and take notice.

  35. Adam May 25, 2017 at 9:23 AM #

    Either way, the reality is that all banking systems tend to have a group of majors which have broad, oligopolistic market power, alongside a group of smaller regional or specialists ( including foreigners) and a range of non-bank financiers.
    Over time the latter groups come in and out of the market but in practice helps to maintain overall competitive tension.
    The regulators job (and of government )is to maintain systemic stability( with economic trade-off between risk and efficiency), not playing games between the players.
    The former has a far greater value in sustaining the long term well being of people, than governments trying to meddle in markets , particularly if the aim is to force re-distribution,or worse,other social policy outcomes.

  36. Graham Hand May 25, 2017 at 9:28 AM #

    CBA’s Ian Narev outlines who ‘they’ are, the ones who will ‘absorb’ the levy:

    Using a breakdown of CBA’s $13.1 billion income in the December half as an example, Mr Narev argued the tax would inevitably impact individual Australians and the national economy.

    The breakdown included $3.1 billion for salaries for 50,0000 staff, $1.9 billion in tax, $2.6 billion in expenses including to about 5000 small and medium enterprises, and $3.4 billion in dividends to about “800,000 families”.

    “So ‘they’ can absorb it needs to either be the staff, the SMEs or the community groups, less lending, less tax, less reinvestment or less to the shareholders,” he said.

    “That is the sum total of ‘they’.”

    The banking sector needed to do a better job of explaining that impact and emphasising that “strong banks mean a strong Australia”, Mr Narev said.

    “And that we get to a certain point … where even though people always understand that having a go at the banks is a fair game, at a certain point you hit the level where it is going to have an impact on all the banks’ stakeholders, where it is going to have an impact on confidence, where it is going to have an impact on stability and we have reached that point,” he said.

    “So we are not pushing back so strongly simply because of the dollars. We are pushing back because of the principle and the impact on the economy.”

  37. Wayne May 25, 2017 at 3:09 PM #

    Just pondering that if Morrison had thought more about it, applying a Federal tax on stock lending and matching repos might have had a really interesting effect in wealth markets.

    *the cost for hedge funds of running extended shorts on listed equities would rise materially
    *the loss of tax revenue through ‘coupon washing’ to avoid AIWT on bonds would be neutralised
    *funds who execute matching repos across dividend dates to obtain surplus franking credits and help foreign investors avoid Dividend Withholding Tax would be taxed
    *there would be less of a case for proper disclosure by funds who lend stock because the practice would now have a disincentive
    * the tax would be more evenly distributed rather than landing at the feet of just 5 banks.

    It would need far more rigorous examination, which is probably why Morrison and crew didn’t examine it.

  38. luci May 25, 2017 at 3:11 PM #

    There is no doubting that the imperative by the banks to sell their products has been to the detriment ultimately of particular and trusting consumers. That is irrefutable.However, it is a sad day in politics where a particular tax has been justified by piggybacking off the negative sentiment towards banks. The power to levy a tax is set in our constitution…which sets out the matters on which federal parliament can levy taxes.
    If we accept this tax we may as well toss the constitution out…..but who wants a parliament unfettered by any restraints ???
    The tax is bad because it has no logical basis other than the fact that the banks can afford to pay it.
    Yes, the banks should be brought to account when they engage in poor selling practices etc etc…but that is why we have institutions such as ASIC and we have class action procedures.
    To justify a tax on the basis of penalising bad behavior sets a very frightening precedent for our politicians to do as they wish……..

    • Graeme Bennett May 25, 2017 at 3:30 PM #

      We can only imagine the tax rates politicians would be paying if they were subject to a tax for bad behaviour Luci.

      I agree with you. Penalising an industry for the shortcomings and illegal acts of some makes no sense to me. This is an unjustified tax grab for mine. Any attempt at an alternative justification is an after the fact rationalisation. Morrison has made a hash of this by playing us for fools. We at least can see through this blatant appeal to our baser populist instincts.

      FWIW I am not expecting any relief under the Constitution though there may be an academic question about levying taxes on an arbitrary group rather than making laws for the good of all.

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