Australia’s budget would likely see billions of additional dollars annually if its largest banks were required to compensate taxpayers for the implicit guarantee that the government would bail them out during a crisis.
As the nation awaits a fourth budget from the Labor government, expected to reveal a decade-long deficit, there is an increasing push for more ambitious fiscal measures amidst broader scrutiny on taxation and expenditure. The opposition is threatening large cuts to public services and spending, while the current government has made only modest efforts in tax reform and superannuation adjustments.
One overlooked aspect is that banks like CBA, Westpac, NAB, ANZ, and Macquarie currently pay a “major bank levy” of 0.06% on the value of their liabilities. Initiated under the Turnbull government, this levy generates about $1.7bn annually and is projected to yield around $9bn over five years. However, independent budget experts, like Chris Richardson, argue that this levy underestimates the insurance value that taxpayers effectively offer these banks by guaranteeing their stability.
Richardson posits that the revenue from this levy pales in comparison to what it should reflect, emphasizing the need to price this insurance appropriately. According to Reserve Bank research, a more realistic levy could be substantially higher than the current level. Richardson suggests that increasing the levy could enhance competition without compromising financial stability.
The Least Worst Option
The head of APRA, John Lonsdale, has highlighted the severe economic and community impacts of bank collapses, urging against complacency given Australia’s long period without a major bank failure. Analysts and credit rating agencies acknowledge an implicit guarantee for major banks, which affects their cost of borrowing and enhances their credit ratings compared to smaller institutions.
The Borrowing Advantage
Estimates, including those from the RBA, suggest that major banks enjoy a significant funding advantage over smaller banks, possibly worth billions annually. This advantage—stemming from the implicit too-big-to-fail guarantee—signifies that the 2017 levy might be substantially underestimating the banks’ benefit from this government backstop. Calls are growing for a recalibration of this levy to reflect more accurately the costs and benefits of this guarantee, potentially raising billions more for the budget each year.
