Photographer: Brendon Thorne/Bloomberg

Will Australia's Bank Levy Become a Cookie Jar?: QuickTake Q&A

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Australia’s mega-banks are seething after the government surprised them by imposing a new levy in the May budget. They’re also furious after only learning about the tax through media reports. Public sympathy is in short supply, though. The banks have faced criticism for failing to give borrowers the full benefit of interest rate cuts and for offering poor financial advice, while at the same time reaping record profits. They view the tax as a “serious attack” on their commercial activities and worry that the levy may become a “cookie jar” for this and future governments to plunder.

1. Why is the levy happening now?

Put simply, the government needs the cash and the banking industry is unpopular with voters. The money raised will plug a gap in the country’s budget, allow increased spending on infrastructure and schools and boost the prospects of realizing a projected surplus by 2021.

2. So what is the levy?

An annual charge of 0.06 percent on certain bank liabilities above A$100 billion ($75 billion). Those liabilities include corporate bonds, commercial paper and certificates of deposits, but not Tier 1 capital – a bank’s core reserves designed to protect it in times of crisis. The government expects the levy to raise A$1.6 billion in the 2017-18 financial year and A$6.2 billion over the next four years.

3. How does it compare internationally?

Many countries have turned to their banks for money after the 2008 financial crisis. The U.K, Sweden, Germany and Portugal are among those which have introduced similar levies. Compared with those rates – ranging from 0.036 percent in Sweden to an initial 0.075 percent in the U.K. – Australia’s is middle of the road. Australian banks say there is a key difference: They didn’t require a direct government cash injection during the financial crisis. Detractors say the banks benefit from an implicit government guarantee – recognized by credit rating agencies – that effectively allows them to borrow at lower interest rates.

4. Who will the levy hit?

The four big domestic commercial banks will bear the brunt -- Commonwealth Bank of Australia, Westpac Banking Corp., Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd. -- together with Macquarie Bank Ltd., part of the asset manager and investment bank Macquarie Group Ltd. The tax won’t impact smaller regional banks and the government rejected opposition calls to apply the levy to foreign banks operating in Australia.

5. How much will it hurt the banks?

Australian banks are among the most profitable in the world, and that won’t change. Four of the affected lenders have estimated the after-tax hit at A$965 million annually. That equates to roughly 3 percent of their combined 2016 profits. Still, the era of continually rising profits at banks may be over, as revenue growth slows and the property market could start to turn. The five banks lost a combined A$33 billion in market value in the two weeks after the media first reported the levy. The bank chiefs are livid and accuse the government of playing “fast and loose” with a critical sector of the economy. “Simply incoherent,” was National Australia Bank Chairman Dr. Ken Henry’s verdict. “Policy concocted on the run,” added Commonwealth Bank CEO Ian Nare.

6. Who will actually pay?

Treasurer Scott Morrison urged the banks not to pass the tax along to consumers, telling the CEOs that the public “already don’t like you very much.” The bank bosses say the tax can’t simply be absorbed. National Australia Bank wrote to shareholders saying it could increase lending rates, invest less or see reduced profits hit investor returns.

7. Is this the end of the story?

The banks await many details about the levy and the legislation has yet to be published. It’s not the only challenge they face: Regulators will soon get new powers over executive pay and appointments, there’s an inquiry into mortgage pricing and a financial complaints authority will be established. On the flip side, the succession of hits taken by banks may have blunted opposition calls for an independent inquiry into the sector. As for the tax, UBS banking analyst Jonathan Mott noted that the U.K. bank levy was raised nine times. “We see potential for this levy to be like a ‘cookie jar’ that can be raided by future governments,” Mott wrote in a note to clients.

The Reference Shelf

  • Bloomberg reports on the estimated cost of the levy to banks.
  • A QuickTake Q&A on Australia’s property market.
  • Treasurer Scott Morrison’s speech on the levy.
  • A 2012 OECD paper on post-crisis banking levies.
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