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:
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.
(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?