Small banks say they will suffer from proposed deposits levy

Small banks say they will be hit harder by the bank deposit levy the government is planning to introduce in the budget because they are more reliant on deposits for funding and have thinner margins than the bigger institutions.

Their view has the sympathy of the Australian Greens which said on Sunday it would pass the legislation for the tax through the Senate so long as it was confined to the big four banks.

Greens deputy leader Adam Bandt said his party would support the levy, in the form originally proposed by Labor, but only for the big four. Mr Bandt said that the big banks had the capacity to absorb the cost.

Under the Greens proposal, if a big bank passed on the levy, consumers would be encouraged “to go to the next tier of banks”.

Mark Degotardi, the chief executive of Customer Owned Banking Association, which represents credit unions, building societies and mutual banks, said applying the tax across the board would hurt competition.

“At a time when the [financial system inquiry] report has found that more needs to be done to foster competition in banking, the first response of the government is to continue with a flawed policy that actually harms competition,” he said.

The banks may also be knocked back again on their long-called for tax break on interest on savings.

The government’s tax white paper to be launched on Monday suggests any discount on tax paid on interest would require “carefully consideration”. It said without a change to tax concessions for interest paid on borrowings to buy assets it could “leave the system open to arbitrage”.

The paper notes interest from deposits and bonds is taxed at the full marginal tax rate while superannuation, property and shares all have lower effective tax rates. This has been raised as one reason Australia has an underdeveloped corporate bond market, with many companies forced to go to offshore debt markets instead.

Treasurer Joe Hockey said on Sunday that the bank deposit levy – 0.05 per cent levy on deposits up to $250,000 – was shadow treasurer Chris Bowen’s tax because he proposed it when in government.

“There’s many things I don’t like that I have to implement at the moment that have been a legacy from six years of bad Labor government,” he said.

“This was announced by Chris Bowen. So it’s Chris Bowen’s tax. And it was announced, he said, on the recommendation of all the regulators, and it’s five basis points on deposits, and it’s meant to pay for a potential bank failure and, as a trade-off, Australians with up to $250,000 in their bank accounts have a government guarantee.”

The levy would fund the present government guarantee on deposits up to $250,000 known as the Financial Claims Scheme. Several countries have introduced a similar levy.

The former Labor government planned to introduce the levy from January 1, 2016. The Coalition said before the 2013 federal election it would adopt the levy but then deferred a decision until after it had held a financial system inquiry.

Mr Hockey said the alternative suggested by the Murray inquiry was for banks to increase their capital holdings. He said he would make an announcement on this in “the next few weeks” when he responds to the inquiry.

The Murray financial system inquiry recommended against the levy, in part because existing laws already allow for a levy to be imposed on the industry in the event a bank fails and there is not enough to cover depositors’ funds.

But senior sources told The Australian Financial Review the government was set to proceed with the levy as proposed by Labor because the government needed the revenue and because of scepticism about the banks being required to increase their capital.

Although the levy would raise interest rates by just 0.05 per cent if passed on in full, Rob Goudswaard, the chief executive of CUA, the country’s biggest credit union, said the impact on mutual lenders would be significant because of their greater reliance on deposits for funding, their thinner margins and older customer base.

“Bigger banks typically have a greater access to wholesale funding. Around 80 per cent of our funding is from deposits,” he said. “Credit unions and mutuals also run on very skinny margins because the benefits of running the business without shareholders is we put more of our returns towards the customer – so the levy would be harder for us to absorb.

“It is also a fair to say that [mutual lender] customers are typically the older generations. Those that are more conservative would tend to hold more of their money in deposits.”

Australian Bankers’ Association chief executive Steven Munchenberg said their chief argument against a levy is that it is not necessary because there are already guarantees for depositors.

“No depositor has lost their deposit since the 1890s. We have depositor preference legislation which means that depositors rank above other creditors in the event of a bank failure,” he said.

“The current scheme would be that in the unlikely event that [a bank] failed the government would use taxpayer money to pay depositors, but then it could levy the industry to retrieve the funds.”

He said it is an easy claim to make from either side of politics that it is a grab for revenue to shore up the budget, but it is hard to see it as anything else. “Given it is not necessary to protect depositors it is not clear why you would do it except that it does happen to bring in an extra half a billion dollars,” he said.

He also said interest earned from deposits is already “tax disadvantaged” compared to other asset classes such as equity and property and the levy would only add to this disparity.

The Murray financial system inquiry recommended against the levy because it would be a permanent cost imposed on banks whereas the existing system only imposes a levy when the liquidation of a bank doesn’t cover its liabilities.

As well as its recommendations for higher capital levels making it less likely a bank would fail, the FSI also recommends a new “payment option” allowing the Australian Prudential Regulation Authority to transfer the deposits of failed banks to another institution.