Finance

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Ask Australians what they hate about their big four banks, and you get a familiar litany of complaints.

Borrowing rates are too high, and deposit rates too low. Profits -- almost A$23 billion ($17 billion) in the most recent fiscal year -- are obscenely fat. Slick sales types promote financial products to under-informed punters without disclosing the full risks. Other employees use hair-splitting excuses to wriggle out of their duties to customers.

Australia's A$6.2 billion bank levy announced in Tuesday night's federal budget won't change any of that. If anything, it's likely to raise mortgage costs, and depress deposit rates. It's still a worthwhile idea.

The Secret of NIM
Net interest margins at Australia's big four banks aren't that high in relation to many of their U.S. and European peers
Source: Bloomberg

For all that locals moan about a market that's more or less stitched up between the big four, Australia's banking system is pretty efficient in global terms. Net interest margins -- a good proxy for the fierceness of competition for loans and deposits -- range from 1.9 percent at National Australia Bank Ltd. to 2.5 percent at Australia & New Zealand Banking Group Ltd.

If that still seems high in a world where UBS Group AG gets 0.95 percent and Mizuho Financial Group Inc. survives on 0.6 percent, it's worth considering those margins in relation to funding costs.

In the chart below, we've plotted the median national NIM among banks with at least $100 billion in assets against the main risk-free benchmark rates. Countries below the line tend to have high NIMs relative to the cost of funds, while those above the line seem to have the most active competition. Australia, if anything, looks marginally more competitive than the global average.

Bank rates and NIMs

One thing you don't hear Australian bank customers complaining about is systemic risk -- but that's the best framework for understanding the new bank levy. Major lenders benefit from an implicit subsidy from the government, which would be certain to bail them out in the event of a failure, in order to prevent a 2008-style crisis.

That expectation delivers them a competitive advantage in the form of cheaper funding costs. Bank levies like the one Australia is planning were first suggested by the International Monetary Fund in the wake of the global financial crisis with the explicit purpose of getting banks to internalize that risk, and adjust their lending behavior in response.

As Gadfly has argued previously, a dose of moderation in Australian banks' lending practices would be welcome. Between 40 percent and 50 percent of new home credit comes in the form of interest-only mortgages and third-party originated loans, two flavors that are most likely to default in the event of falling property prices or rising rates.

Still, few customers are likely to cheer the effects of the levy because, as Australia's banking sector has argued, the costs of such taxes are ultimately passed on to them.

The Levy Was Dry
The rate at which Australia plans to tax banks' liabilities isn't that high
Source: Australian Treasury, Kogler (2016): On the Incidence of Bank Levies: Theory and Evidence
Note: Not all levy bands have been shown. Only levies on liabilities have been included. All levies listed exclude insured deposits.

A typical levy raises lending rates of 5.85 percent to about 6.09 percent, while NIMs of 2.48 percent would climb to about 2.53 percent, according to one 2016 study of European countries that had implemented such measures.

Those effects are modest, and are likely to be particularly so in Australia given the circumscribed nature of the tax. It will be levied at a middling rate of 0.06 percent, and will apply only to a subset of banks' liabilities above A$100 billion, in contrast to the broader taxes that prevail in Europe. NIMs also widen more in the most concentrated banking markets, the 2015 paper found -- so Australia's competitive sector is likely to be less affected.

Competitive Advantage
Australia's big four banks already charge more for home loans than the competition
Source: Bank websites
Note: Based on standard variable rate comparison rates for owner-occupier mortgages, where available. Where banks don't highlight a standard variable rate, rates for owner-occupier mortgages between $150,000 and $500,000 with loan-to-value ratio of less than 80% have been chosen. Comparison rates include the cost of fees and charges.

In theory, the A$100 billion limit might give Australia's smaller home lenders a competitive leg-up -- but they typically offer better-priced mortgages than the big four already, so that's unlikely to be a decisive change. The array of other housing-related measures announced in the budget, in addition to the prudential regulator's efforts to crack down on risky lending, will probably have a greater effect.

No silver bullet is going to solve the problems of Australia's overpriced housing and over-leveraged banking system -- but that's no reason to avoid incremental measures like this. Every step along the road counts.

-- Elaine He assisted with charts

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net