Public opinion and expert advice has been overturned in favour of letting banks regulate themselves. What could go wrong?
Well, our long-suffering banks finally had some good news this week.
After being frustrated at every turn in their efforts to quietly serve the community, some sensible politicians have actually had the decency to ask what they thought about something. And listened.
And so the government, ever-ready to strike out independently in the national interest, decided to scrap the bank deposit levy.
This whacky idea, which came out of that hot-bed of militant socialism – the Council of Financial Regulators – was that a tax of 0.05% should be applied to all deposits that benefited from the Government’s deposit guarantee.
The deposit guarantee you’ll remember was introduced during the GFC. At the time the government said that it will guarantee deposits up to $1m in case anything awkward happened to your bank.
Once the hoo-ha of the GFC settled down, and the financial system looked more secure – the guarantee was scaled back to $250K, but that’s still substantial.
In the twisted world view of the Council of Financial Regulators, the banks receive a lot of benefit from this guarantee, especially the Big Four with their ‘too big to fail’ status.
In their eyes, if the government is effectively seen to be propping the banks up no matter what, there’s no risk. If you lend money to the bank, you’ll get it back. Either the bank pays of the government does. Either way you’re sorted.
I’m talking about depositors here, but I’m also talking about international capital markets where the big banks get most of their funding.
And with the guarantee in place, banks can borrow at a lower cost. They’re seen to be more credit worthy. They get a discount.
(Imagine the kind of discounts you could get on your mortgage if you could put the entire Australian population as guarantor on your loan.)
And if they’re getting a discount on their borrowing, it means they get bigger margins on their lending. Bigger margins mean bigger profits.
Banks like profits.
But notice here that it’s the government guarantee (using money raised by taxes on you and me) that helps the banks make more money.
If I’m giving money to the tax man, I want it spent of submarines and koala protection zones – not helping banks make more money.
(Banks made $30bn in profits the year the deposit levy was floated.)
And so the Council of Financial Regulators thought that banks should pay something for this benefit they receive. That there should be some sort of fee attached to this free default insurance.
And that’s the idea of the deposit levy. The money raised would go into a quarantined fighting fund with the government to sure up the financial system if needed.
But no, Joe Hockey has listened to the community. “I have consulted with all the CEOs of the banks. They put good arguments as to why it should not proceed.”
That’s good enough for me, Joe. Good on you for taking the time to listen.
Another win for the community.
Don’t listen to those pinkos at the Council of Financial Regulators, the Reserve Bank, the IMF and the global financial community consensus on best practice. They all have a secret agenda to slip fundamental sharia socialism in the back door.
Stand strong and protect the freedom of our selfless and patriotic banks.
Oh man. I’m going to pop a gasket if I keep going like this.
This decision really does my head in. And look, maybe the deposit levy wasn’t the right way to tackle this issue. Maybe we could have got there through higher capital ratios or something.
But in dropping this proposal, the government has left the issue wide open – like a gaping chaff wound on the inside of their thigh.
And the issue is about perverse incentives. If the banks know that the government will bail them out if they get into trouble, then there’s more incentive to take more risks with prospects of bigger profits.
If the gamble pays off, sweet, big profits and a fresh case of champers in the bar fridge on your super-yacht. But if it doesn’t pay off, no worries, just send the bill on to the government.
It’s heads they win, tails we lose.
And if there’s anything to be learnt from the GFC, we need to be nipping these perverse incentives in the buds wherever and whenever they show their ugly little heads.
The financial system depends on it.
And look, I don’t really think that the banks are run by greedy reptiles who delight in human misery.
But as an organising principal for building a financial system, it’s a good idea to think that they are.
People will respond to the incentives that are in front of them. And in a competitive system, if one bank starts fudging the risks a little, then they all have to. Otherwise they’re uncompetitive.
You can’t ignore this reality.
But this is exactly what the government has done. If you want to scrap the levy because you don’t like levies, fine. But at the same time you need to scrap the implicit guarantee.
You can’t just leave it there and hope no one notices. It’s going to bit us in the arse at some point.
But no. Abbott saw a chance to help out his banking mates (the financial sector are massive donors to both parties) and run another sound byte about scrapping a Labor tax.
And something about boats.
But then, if you think Labor would have done better, you’re dreaming. The whole system is gamed.
And not in our favour.
What’s the problem here?
The banks? The government? The economy?
Or our property market?