Are the banks going to blow the whole thing up? Do they even have a choice?
I was talking about this Bank Levy business with a good friend of mine. He’s a smart man – has a PhD in mathematics and game theory. His take on the whole bank levy thing has really got me thinking… and a little bit scared.
On the face of it, I like the levy. The too-big-to-fail banks enjoy an implicit government guarantee. That means that if sh!t hits, the fan, the government (i.e taxpayers) has their back.
The markets recognise this situation, and so are willing to lend them money more cheaply. As a result, Aussie banks are some of the most profitable in the world:
Killing it.
Christopher Joye at the AFR reckons the government guarantee saves them about 0.18bps on their funding costs. So a levy that slaps them with 0.06% on their liabilities, only claws about a third of it back.
So it’s only fair. And it many ways it helps level the playing field with smaller banks who don’t have a government guarantee.
But as my friend pointed out, the problem is that this isn’t directly tied to their funding guarantee. It’s just a levy. Just a tax. Just because ScoMo said so.
And this makes it dangerous. The UK introduced a bank levy a few years back, and guess what happened? Since then they’ve jacked it up 9 times.
9 times! And why wouldn’t they? It raises a lot of revenue, and everyone hates the banks. It’s like free money. Whee.
And since our Bank Levy isn’t tied to anything either, what do you think the chances are that it will stay at just 0.06bps?
Would sod-all be a fair estimate? (That’s what my mate reckons it is.)
So think about this from the bank’s perspective for a sec. This is not just a one off cost that they somehow have to manage. Who knows where it’s going to end up?
Letting the government tax you now is like letting Dracula set up a catheter in your jugular and trusting him to only take as much as he needs.
(Just a couple of drops to tide me over to pay day…)
So there’s a lot more at stake here than the initial estimate of $1.5bn a year. It’s a liability that could quickly grow to $3bn or $6bn or $12bn!
So the stakes are high – much higher than I thought.
The question now is how are than banks going to play it?
So far, their response has been fairly predictable. And that’s because somehow the government did a good job of keeping it secret. The banks genuinely seemed to be caught off-guard.
And so their response has been pretty lame. It’s “tax by stealth”. It’s going to be passed on to consumers, or maybe shareholders. Jobs are at risk. It’s “playing fast and loose”. It’s poorly thought out and light on detail.
The banks seemed to be throwing up a bunch of muck and seeing what stuck. But all it did was just create noise, and by the time the banks had figured out their story, the front pages had moved on.
The PR battle has been fought and won.
And this is what makes me nervous. If the PR battle is won, what happens next? If you back a grizzly bear into a corner, what happens next?
As my mate says, the banks can’t afford to roll over on this one. If they cop it sweet, and spread the cost out across their consumers, shareholders and staff, all it says to the government is that cookie jar is open.
Next time you need the money, just dip in here first.
My mate says that the banks have to go hard and they have to go now. They don’t have a choice. Even if they lose this particular battle, they have to leave the government with enough scars to make any future government think twice about tapping the Bank Levy cookie jar.
If they don’t it will cost them another $6bn… at least!
So how would they do that?
Well, what does a banking sector on the offensive look like?
I don’t know what you reckon (I’m genuinely curious, let me know your thoughts), but I think whatever counter-offensive we see, it’s going to involve rate hikes.
A lot of rate hikes.
My friend reckons the dominant strategy for the banks is to hike rates so hard that they almost put the economy on the floor. … almost.
And I think they could do that. They could say, we’ve got the bank levy to deal with. We’ve also got APRA on our backs about shoring up our capital bases. Fine. You want us to be “unquestionably strong”? Here it is.
100 bps.
Bam.
(I’m in a pretty sweet position but even I would notice a full extra percent on my interest payments.)
And if they really wanted to stick the knife in, they could focus hikes on investors (since negative gearing would mean the government would actually get less revenue) while giving first home-buyers a discount to try and sway public sentiment.
They could also go hard on foreigners purchasing apartments to try and push the (already-shaky) apartment segment over.
100bps, overnight, would hurt. A lot. It could be enough to break sentiment in the property market and in the broader economy altogether.
It could be enough to bring on a recession, which would be enough to ensure the government was turfed from office.
And that, maybe, would make any future government think twice about tapping the cookie jar.
And ScoMo says he’ll be watching the banks closely, but it doesn’t matter. Even if the ACCC forced them to reverse course at some point down the track, you only need high rates for a short time to snap the neck of sentiment. A month would probably do it.
If my mate is right, it’s a dangerous situation because the banks’ strongest play seems to be to take the economy to the brink of collapse, if not over it altogether.
It’s killing me imagining what’s going on behind the scenes right now. It’s going to make a fantastic book one day.
If we make it through.
What do you think? Is my friend making a mountain of a mole-hill?
Peter says
I agree that ‘it’s going to involve rate hikes.’. But not sure about ‘A lot of rate hikes.’ because there are other lenders if the customers are not happy they can always switch to another lender.
Rudolf Ruyter says
I agree that there may be battles to decide who actually controls the Australian economy,,,The Gov. or the banks……It is a battle we can not allow the banks to win…..The problem now is that these banks are “Too Big To Fail” which is why they are guaranteed.
There are 2 solutions….they either toe the line, or we change them so they are NOT too big to fail,
and separate the “savings” from their “investments”, so our savings are no longer at risk.
Then they no longer require Gov. guarantees.
1st step after they increase charges would be to DOUBLE the new levy, if that does not stop the banks raping our economy, then triple the levy…..if that does not work….then just like Telstra, break them up into smaller entities so they are “Not too big to fail”
Government can negotiate with a much bigger stick than banks….
Brendan says
My question would be, what percentage of Australian mortgages are currently under or bordering on being “stressed” across the affected banks loan portfolios. That will certainly give insight to how the big banks will react. They will have to be tactical for their own sake on how and to which loan sectors they pass on the burden of the levy.
Raphi says
I’m not so sure they can pass the levy on to consumers so easily. There are a lot of second tier lenders around with very competive rates who will not be paying the new tax. If the majors raise rates they will no longer be competitive in the market and will risk loosing a lot of new and existing business.
Roger says
Agree with Peter to the extent that the general public do not have a lot of sympathy for the big 4/5 and will be watching them closely. Should they indulge in the type of brinkmanship that you predicting it could result in the government coming down even harder on them with the blessing of the voters.
Having said that, the banks do have a genuine cause for concern regarding the potential for the government to keep on increasing the levy. I personally wouldn`t have a problem with it being fixed.
Jon the scariest thing in your article is not what the banks may or may not do, it is your analysis that it would only take a 100bps increase in interest rates to potentially cripple our economy. That is a real worry, because unfortunately I suspect you are correct.
Davo says
Enjoying your provocative commentary Jon, however the tone you use suggests everyone considers the whole bank levy thing legitimate. Im taking a more skeptical position and assuming the banks (corrupt) and Politicians in power (Government) have worked out a deal, and the stability of the economy as determined by the RBA would be central to this deal/arrangement. Realistically, a Banking royal commission would be disastrously non productive for the Banking Sector, and you can imagine what sort of legislative changes, sackings, reduced commissions, transparency and and even policy changes, that such an event may produce as a result of its findings.
Nope, the best best solution for Malcolm and the RBA would be to agree on a levy, that is not so much punitive but works to take the attention away from a Royal Commission. Only a Labor Government would be dumb enough to think a Royal Commission would be a political spring board to greatness!
And remember, the levy has to pass the senate before it can be implemented. What we end up with is anyone’s guess, but sure, the banks will make a noise, and interest rates will rise – did you think they would go down? And as long as Malcolm and the RBA get along politically and commercially, I think things will be stable. We all should be questioning the stories that the media put out and applying a great deal of skepticism to most of it.
Jon Giaan says
Good point Davo. Always good remembering it could all just be a bit of theatre.
David says
The banks have just upped interest rates 0.5% at the request of APRA to cool the Sydney and Melbourne markets. That is a huge amount of profit, far more than the measly tax Will cost them.
No one has any respect for the banks. A PR campaign will fail and only further alienate the banks. The ploy of how much this will impact on people’s super funds was poorly thought out and argued.
A strong PM would give them a choice. Suck it up or a Real Royal commission with real consequences. The banks have got off far to lightly for some of their dodgy financial advice and poor insurance products. There are a lot of skeletons buried in the banking closet the last thing They want is for them to come out and the consequences that would follow from angry Government.
Rick says
Government is not without the ability to threaten banks. Imagine the trepidation among banks if a government decided to re-establish a government bank. It could literally issue loans at rates that would drive private banks out of business.
Albert says
Hardly, I would say, Rick, in NZ you have Kiwi bank, established by the NZ government a few years ago, the rates offered by them were about the same as the other banks, maybe a bit less hard on their customers ( more lenient when it comes to late payments or default) but no significant difference in rates offered. So I don’t see any threat there.
ron goddard says
hi jonno,
a very interesting article indeed. mountains come from molehills, i think. your friend is probably telling you to bail out of all your investments real fast like, because things, when they happen, happen real fast and one gets caught up with nasty events….like money shortage(cash) to service seemingly affordable mortgages now(molehills), but becoming horrendously expensive, consumptive mortgages, (mountains).
so beware the government, oh so its us then! we are the government with poll happy hitmen steering the ship. funny thing is that most of them wouldn’t know how to steer a ship. so where does that leave us? man the life boats!!! cheers, ron
Tim says
I dont understand? I love my bank! They gave me money for my profitable investment property! It is BOQ though. I dont like walking into the cold calculating atmosphere of other banks…