In a freedom of information request, released by the RBA we get some insights into the discussion around whether the major banks benefit from the implicit assumption that in a time of strife they will be bailed out by Government.
The credit ratings of Australian banks do benefit to some extent from rating agencies’ perceptions that the Government would support them if they got into trouble. The major banks and Macquarie receive a two notch credit rating uplift from S&P as a result of the rating agency’s expectation that these banks will receive support from the government in a crisis. Other Australian banks do not receive any rating uplift, as S&P does not expect government support.
The released documentation discusses the different modelling approaches and also some of the international analysis which has been done on the subject. The real benefit does appear to change over time (depending on the risks in the system) but the net conclusion is the majors do get benefit. It is hard to put a value in it, but a figure between $1.9 and $3.8 billion (between 14 and 28 basis points) was suggested in 2013.
One submission to the financial system inquiry applied rates from the same study to the non-deposit liabilities of the major banks to estimate the dollar value of the implicit subsidy to these institutions at between $5.9 and $7.9 billion per year.
Systemic risks may be higher as a result.
An implicit government guarantee creates on incentive for creditors to fund banks at rates below those justified by their financial health, thus providing an implicit subsidy. lf of significant size, this subsidy has the potential to distort competition and increase systemic risk.
However you read it, the majors are supported by the implicit Government guarantee. It does not seem to pass through to borrowers or depositors in better rates.
