Monday, May 15, 2017

At last, some sensible commentary on bank levy | MacroBusiness

From Leith van Onselen:

……The bank levy helps internalise some of the cost of the extraordinary public support that the big banks receive from taxpayers via the Budget’s implicit guarantee (which provides a two-notch improvement in the banks’ credit ratings), the RBA’s Committed Liquidity Facility, the implementation of deposit insurance, and the ability to issue covered bonds. All of these supports have helped significantly lower the banks’ cost of funding and given them the ability to derive super profits.

As noted by Chris Joye on Friday, the 0.06% bank levy is also very ‘cheap’, since it would only recover around one-third of the funding advantage that the big banks receive via taxpayer support:

“If the two notch government support assumption is removed from these bonds, their cost would jump by 0.17 per cent annually to 1.11 per cent above cash based on the current pricing of identical securities. So the majors are actually only paying 35 per cent of the true cost of their too-big-to-fail subsidy…

Requiring banks to pay a price for the implicit too-big-to-fail subsidy is universally regarded as best practice because it minimises the significant moral hazards of having government-backed private sector institutions that can leverage off their artificially low cost of capital to engage in imprudent risk-taking behaviour.”

Again, what better way to internalise some of the cost of the government’s support than extract a modest return to taxpayers via the 6 basis point levy on big bank liabilities?

The Turnbull Government’s unexpected bank levy announcement is the single best thing to come out of the 2017-18 Budget. It deserves widespread support from the community and parliament.

I have my doubts that the new bank levy is a step in the right direction. Most observers would agree that the banks are getting a free ride at the taxpayers expense, but this is not a solution.

Remember that the Commonwealth Treasury is not an insurance fund. And the risk premiums (levy) collected will go to fill a hole in the current budget, not to build up a fund against the future risk of a banking default.

There is no way to avoid it. Australian banks are under-capitalized, with about 6% capital against unweighted risk exposure (leverage ratio). Charging a bank levy does not solve this. Raising (share) capital does.

The levy merely provides the banks with another argument against raising more capital. I would much rather see a levy structured in such a way that it penalizes banks who do not carry sufficient capital, creating an incentive for them to raise further equity.

Neel Kashkari, President of the Minneapolis conducted a study to determine how much capital banks need to carry to avoid relying on taxpayer bailouts. The conclusion was that banks need about 15% capital against (unweighted) risk exposure. Too-big-to-fail banks require slightly more: a leverage ratio of about 18%.

Source: At last, some sensible commentary on bank levy – MacroBusiness

May 15, 2017 at 10:29AM

from ColinTwiggs