Bank levies — coming to a location near you soon!
31 March, 2015
Bank levies have been a hotly debated topic in this part of the world recently. Am I right in my understanding that the Australian coalition government is set to be the next country to implement one?
It certainly looks that way, Mike. Specifically, they're talking about the federal government imposing a levy or tax on all Australian banks related to the size of deposits they hold.
While the discussion around bank levies are nothing new, the former Labor Government last put forward the policy in 2013, which at the time was strongly criticised by then shadow Treasurer, Joe Hockey, and described as a "smash and grab on Australian households". But now as Treasurer, Joe Hockey looks set to do a u-turn, by all accounts.
The principle behind the levy is to use the funds to setup a depositor insurance program, correct?
That's right Mike. The government charging banks a small fee or levy on the deposits they hold on behalf of savers, so as to fund the creation of an explicit deposit insurance scheme, is a reasonable concept in my opinion.
But taking a step back for a second, the reason for needing to setup such an insurance scheme in the first place is because the Australian government is stepping back from guaranteeing bank deposits. It's is because of this they must find another way of protecting bank depositors. The question then quickly becomes if an insurance scheme is the right concept to fill this gap, who's pays for it?
Do the banks themselves swallow the cost of this levy or do they pass this on to their clients in the form of lower deposit rates and/or higher mortgage rates? Australian bank profits have continued to reach impressive new all-time highs as far as profits go in recent years, but unfortunately I think I know the answer to this one and again its mum's and dad's that going to be left footing the bill.
Is it inevitable that if such a levy was introduced in Australia, New Zealand would likely follow suit?
That's right. Well at least that is my assumption. The Reserve Bank of New Zealand, who is obviously in charge of oversight of our local banks, previously reached the conclusion that a deposit insurance scheme was not appropriate for New Zealand at that time. They did however leave the door open to changing this stance should developments abroad or domestically justify it. A move like this by the Australian government is such a development in my opinion.
We can't lose sight of the fact that 70% of high-income countries already have some form of depositor insurance in place today. Australia and New Zealand really are the outliers.
With low interest rates already making it hard for retirees and those living on fixed incomes, this is a concerning development.
Unfortunately so, Mike. Again I can't see our local banks, despite their similarly impressive profits of late, choosing to swallow this cost themselves, unless they are somehow forced to. I must stress though that there is plenty of water the cross under the bridge before now and then so we must not jump to conclusions at this stage.
What is clear to me though is that the New Zealand government has already paved the way for such a levy to be brought in. They did this by implementing the Open Bank Resolution (or OBR) which removed the implicit government guarantee on deposits in New Zealand. That in itself is a point not appreciated by a majority of New Zealanders as a recent FMA survey found. It suggested 52% of term depositors still thought their deposits were Government guarantee here in New Zealand. The fact is they unfortunately are not.
So I'd argue that in light of the Open Bank Resolution and our Government already no longer implicitly backing bank deposits, better protection of our hard-earned savings sitting in the bank is actually required.
What do you estimate the cost of this levy being?
Well as I said earlier we have some way to go before a levy is implemented like this in New Zealand, but the latest estimates in Australia are that it would come at a cost them around $400 million per year. Here in New Zealand the figure would likely be much lower than that but could certain exceed the $100 million mark per year.
A cost that with interest rates as low as they are is undeniably going to be another bitter pill for savers to have to swallow.