Australian Bank Levy - is it really as bad as it seems?

If you have tuned into a Current Affair or spent time pursuing various click bait articles you will be well aware that the governments proposed 0.06% levy on all major banks (the Big 4 and Macquarie) will bring doom and gloom to households across Australia. 

But, will it? Speaking as a proud member of Generation Y I have been taught that just because something is on the internet doesn't mean it's true. I want to understand the proposed levy more, weigh up the good and the bad and see if a change in 6 basis points will make a difference, especially as the RBA makes changes at 25 basis points at a time and that doesn't create as much of a stir.

On Tuesday 30/5/2017 the Turnbull Government introduced draft laws to parliament proposing the levy. They estimate the levy is set to raise around $6.2 billion dollars which will ideally help reach the utopian state of a surplus budget.  

"The government is committed to ensuring Australia's largest banks are held to account and make a fair additional contribution to the Australian community which they serve," Treasurer Scott Morrison told parliament on Tuesday.

The basics 

Essentially - the major Australian banks with liabilities of more than $100 billion are being taxed an extra 0.06% from July 1 2017, which will raise the Australian government some serious cash. Which, in turn will assist the Liberal Government in paying for disability insurance and also help towards the aim of closing the existing budget deficits and return the budget to balance by June 2021.

Bank levies aren't a brand new thing, they were introduced on 2007 - 2008 during and post GFC. In the UK there is a bank levy which is 0.08%. Economist and former Rudd Government advisor Andrew Charlton has praised the measure, "...they have two benefits to financial stability and competition. First, because it's applied to the biggest banks it helps re-balance the market, and secondly because it applies inter-bank funding it encourages banks to fund themselves through more stable and less risky sources."

This definition of 'Bank Levy' has been sourced from Investopedia

A type of taxation system on financial institutions, in which banks are forced to pay government taxes over and above any normal corporate taxes they may incur. This is done in order to maintain financial discipline and prevent outlandish spending, bonuses or possible overly risky behavior. Bank levies are generally viewed as punishment to financial institutions.

Perhaps the banks have been acting badly? It is interesting that the Treasurer posted a very stern video via twitter this morning promoting and detailing the governments new 'Executive Accountability Regime' for Banking Executives. Essentially, executives can be de-registered and have their bonuses revoked if they do the wrong thing. There is also a new Financial Complaints Authority that will act as a 'one stop shop' for all issues that clients may be having with their banks, but I digress. 

Scott Morrison has mentioned countless times that the bank levy isn't an excuse for the big banks to increase costs for their customers.  However there have been several experts, economists and politicians speaking out against these claims, saying that no Australian would believe that the banks won't pass it on via higher rates and fees. 

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The bad 

Banks and their bosses aren't happy about the levy. Why would they be?! An extra tax is all they need. I imagine that it'll definitely tighten the purse strings amongst the Boards of Directors, CEO's and COO's and may affect the lavish Christmas parties this year. 

Jokes aside there have been strong arguments against the levy. There has been commentary that there is absolute certainty that this levy will be passed on to the banks customers and if that happens it could really be pushing Australians head first into a 'perfect storm'. Rates going higher as a result of the levy, lack of growth in wages, higher cost of living and too much debt. Forget the mining boom unwinding, if the Australian property market collapses, might it lead us to a recession? 

Now I'm not an economist, I hardly understood the basics behind my Year 11 maths so I am under no authority to predict a recession, but it seems a bit odd that the government would push forward with this levy is it was going to cause such havoc for the economy and Australians in general.

Bank bosses react to new levy - Australian Financial Review

There have been cries that this levy is amounting to "quasi-nationalisation" (which essentially means that the government will own the banks). A briefing note that has been written from a Liberal leaning think tank to all MP's about opposing the levy has said "The government's proposed changes will undermine the free enterprise system by effectively turning banks into an arm of the bureaucracy."

Studies of European countries indicate that bank taxes similar to the 0.06% levy will be largely passed on to customers, not shareholders, this can be done by increasing fees, interest rates or both! 

Now, for someone in the higher income tax bracket they make not notice the increase, for them it may mean that they aren't able to have a second coffee as that 3pm drowsiness kicks in. However for lower income earners that already have every dollar budgeted a rise in fees might be the difference between keeping their house or falling behind on their repayments and potentially being in serious financial difficulty which in turn could increase the levels of people defaulting on their loans. 

The good  

It goes without saying that this levy is a way of returning some market power to the smaller banks and credit unions. They will be quietly quite chuffed with the new levy. The smaller banks have stood on their soap boxes saying that the big four banks have an unfair advantage all thanks to Paul Keatings 'four pillars' policy, which essentially blocks the merging of any of the main banks to maintain some competition. 

I daresay a lot of the public will be quietly pleased that the banks are going to be under more scrutiny and in the chance any higher ups are found to be behaving badly they will be fined and by the sounds of it, it wont be a slap on the wrist! It will be huge fines and even claw-backs of substantial bonuses. 

That is the Australian way after all, right? Fair go for all and if you stuff up you don't get away with it.

If this levy goes ahead (it was introduced to parliament on 30/5/2017) people will be quick to look at the smaller banks and refinancing as soon as they can and this isn't necessarily a bad thing. 

Out of the 5 banks that have been hit by this levy we still have over 20 on our lender panel that won't get hit by this tax. Sure, there are some benefits that come with getting a loan through one of the majors, however we have many lenders that are just as competitive as the majors! 

Obviously the banks affected by this levy are crying poor and are saying that it is unrealistic for the banks to absorb the cost and that they simply will have to pass it on on their customers, however when a similar levy was introduced in the UK the banks just absorbed it and moved on. Sure, their profits were down and the shareholders didn't get as large dividends, however the banks didn't pass it on to the customers.