The closer one looks at the government’s recent decision to levy a deposit tax against Australia’s Big Four banks, the more it seems like a revenue grab. Nothing more, nothing less.
An inspection of the legislation reveals that in the event of the failure of an Australian bank, there is no need for a levy to fund a depositor bailout. That means this proposal is not a deposit levy. It is simply another tax, with little to do with protecting depositors in the event of a bank failure.
Three crucial factors substantiate this assertion: the Banking Act, the levels of retained capital, and hypothecation (the practice of pledging collateral against debt).
We’ll explain why.
First, to the Banking Act of 1959, in particular s 13A, which provides that in the event of insolvency, an Australian bank (referred to as an authorised deposit taking institution, or ADI) is required to reimburse Australian “protected” depositors before settling claims by international creditors or offshore depositors.
Section 4 of the Act defines a protected account as:
An account, or covered financial product, that is kept under an agreement between the account-holder and the ADI requiring the ADI to pay the account-holder, on demand by the account-holder or at a time agreed by them, the net credit balance of the account or covered financial product at the time of the demand or the agreed time (as appropriate).
Effectively therefore, protected accounts are all demand deposits. That is to say, deposits where the owner of the funds can withdraw their funds at any time.
The University of Melbourne’s Professor Kevin Davis has run the numbers, and his findings are that in the event of insolvency, no Australian bank would be so bankrupt that it would not, at least, be able to reimburse Australian depositors.
If Australian depositors are protected as preferential creditors (which they are), and if at current capital adequacy levels no Australian bank would be unable to refund domestic depositors, then the obvious question is why do we need this levy?
Secondly, the notion that this is some kind of “user pays” scheme is disingenuous. Today in Australia it is almost impossible to exist, in any meaningful economic sense, without a bank account.
That means any deposit into an account in any of the big four – drawing a wage or conducting any kind of business – will be covered by this levy. So as revenue grabs go, this one catches in the net something like 80% of all deposits.
In theory, the monies collected by the levy will be held in (that is, hypothecated to) a new entity, the Financial Stability Fund (FSF). Other than its name, little is known about this new fund. It is obviously meant to be a long-term mechanism as it will take many years - the exact timing being dependent on the levy rate chosen - before the fund will cover even a small percentage of potential pay-outs to depositors.
However, the fund is not designed to cover all pay-outs to depositors in the event of a bank failing, but only any amounts not recovered by other means. Calculating the size of the levy is problematic and must then take account of other measures, particularly the amount of capital that banks hold.
In suggesting that a so-called “ex-ante” levy be introduced to promote financial stability, the IMFalso recommended that additional capital, in the form of so-called Higher Loss Absorbency (HLA), be required for “systemic” banks (which in the case of Australia would be the Four Pillars).
This recommendation has been accepted by banking regulator APRA and, from January 2016, the big four banks will be required to hold an additional 1% HLA capital buffer. This additional 1% capital, which APRA admits is at the low end of international levels, must be met through so-called Tier 1 Equity capital, which helps to explain the current capital raising efforts of the banks and the negative impact on their share-prices.
Since it is expected that a bank’s capital should be sufficient to withstand all but the most severe shocks, it is a moot point whether the belt-and-braces approach of collecting an additional levy would add much towards ensuring financial stability. As it is not yet known how much of a buffer the new levy will actually provide over time and no mechanism has as yet been created to manage the monies collected, the decision to go ahead with the levy appears to be a path of least resistance (blame it on the previous government) rather than well-considered public policy.
In particular, the use of a fixed levy (of the order of 0.05% of deposits) is not in line with international experience, where a risk-adjusted fee is often used, and may be more appropriate to the Australian banking system.
The Murray inquiry went so far as to reject the idea of a deposit levy in favour of requiring Australian banks to be “unquestionably strong” and in the top tier of international banks as regards capital. It appears that by cherry picking recommendations from the IMF and the Murray inquiry, the government may be in danger of increasing the costs of banking in Australia without improving the stability of the system. Who would have guessed?