Banks seek to delay levy implementation

From InvestorDaily.

The Australian Bankers’ Association (ABA) has called for the “usual consultation and policy processes” prior to the implementation of the bank levy contained in last Tuesday’s federal budget.

In a submission to Treasury on the major bank levy, the ABA said the budgetary measure is “rushed” and “not in keeping with the government’s own best practice guidelines”.

The levy would impose a tax of 6 basis points on the assessed liabilities of the ‘big four’ and Macquarie.

In its submission, the ABA called on Treasury to conduct a detailed regulatory impact status before the bank levy bill is introduced to Parliament.

In addition, the ABA repeated its calls for increased modelling on the economic and taxation impacts of the proposed levy.

The bank lobby group also pointed to the short consultation period on the draft legislation, which is set to be finalised before the bill is introduced to Parliament on 31 May 2017.

“The ABA are alarmed with the truncated time for consultation, as well as the fact there was no prior consultation, nor will exposure draft legislation be released for public comment,” said the submission.

“The ABA believes there is further opportunity for consultation as the tax will only be levied for the first time on 30 September 2017.”

The ABA also argued for a more “co-ordinated consultation” with all the affected regulators, including APRA, ASIC, the AOFM and the RBA.

“For example, the ABA believes it is crucial that Treasury and APRA be given adequate time to assess if the bank levy is consistent with developments in prudential regulation such as the unquestionably strong requirements and Total Loss Absorbing Capital (TLAC),” said the submission.

Treasury Receives Big Bank Feedback

NAB and ANZ have released their formal responses to Treasury relating to the liability tax.

NAB believes the levy is poor policy and, accordingly, does not support it. It says the levy is not just on banks, it is a tax on every Australian who benefits from, and is part of, the banking industry.  They then try to define the bounds and sensitivity of the calculation, with a view to reducing its impact.

NAB requests the production of a Regulatory Impact Statement (RIS) and a period of public consultation on the draft legislation. NAB recommends the levy be applied to the netted derivative balance sheet and collateral position. NAB recommends that the basis for the levy be adjusted for the impacts of the accounting gross ups which occur as a function of inter-company transactions. NAB recommends that the funding of high quality liquid assets be excluded from the levy calculation. NAB recommends that repurchase agreements be excluded from the calculation of the levy. NAB recommends the exclusion of non-funding liabilities, in particular, liabilities and provision for taxes and the levy. NAB recommends that, if included, only targeted anti-avoidance measures are contained in the
legislation. NAB also recommends that discretion be applied on any penalties for under payment.

It needs to be read in conjunction with their CEO’s earlier comments.

ANZ has more broadly tried to explain the potential impact of the tax on customers and shareholders. They also suggest a delay till September 2017 to allow sufficient time for design of the legislation and recommends the tax should be applied to the domestic liabilities of all banks operating in Australia with global liabilities above $100 billion. Finally, they argue the levy means it would be appropriate to re-think the need for any bank loss-absorption framework in Australia.

Westpac said last week:

“Westpac Group CEO, Brian Hartzer, said the new bank tax is a hit on the retirement savings of millions of Australians as well as all bank customers.

This levy is a stealth tax on their life savings, the shares in their superannuation accounts, and it will make Australia’s banks less competitive.

“Yesterday, $14 billion of value was wiped off Australian bank shares because of speculation around this new tax.

“There is no ‘magic pudding’. The cost of any new tax is ultimately borne by shareholders, borrowers, depositors, and employees.

“The Australian banks are already the largest taxpayers, with Westpac the country’s second largest taxpayer. Westpac already pays over 30% of its profits in tax and this will now increase even further,” Mr Hartzer said.

“While similar taxes operate in other international jurisdictions, they were introduced to recover the cost of Governments having to take over their banks. No taxpayer funds have been used to prop-up the Australian banks. In addition, international jurisdictions that apply measures such as this already have much lower corporate tax rates than Australia – for example, in the UK the corporate tax rate is 20%.

“It is disappointing that the Australian Government has implicitly favoured large foreign banks over Australian banks operating in their home market.

“In addition these reforms are directly counter to APRA’s objective of making the banks unquestionably strong, as higher taxes reduce the banks’ ability to generate capital that supports lending and stability in times of stress.”

Bank Tax Is Positive, Not Negative, For Big 5

Interesting take on the Bank Levy from Christopher Joye in the AFR.

For the first time big Aussie banks can point to the fact that they now pay a specific levy in lieu of their too-big-to-fail status, which should in theory further reduce their cost of debt and equity.

Previously this particular government guarantee was implicit: from July 1 it becomes explicit. This directly reduces the probability of default and loss on the banks’ deposits and bonds, which should shrink the interest they are required to pay. Equally the banks’ cost of equity should decline given they now have materially lower risks. The explicit too-big-to-fail government guarantee actually gives the banks grounds to go back to depositors and bondholders and demand that they pay less, not more, interest, precisely because their perpetual nature has now been written into law.

It is entirely possible that this reduction in the banks’ weighted-average cost of capital could completely offset the (modest) 0.06 per cent levy. Any residual cost can easily be shared with customers via slightly higher product costs. The banks are about to receive another excuse to jack-up loan rates when by “mid-year” the Australian Prudential Regulation Authority releases its new equity capital targets to ensure these too-big-to-fail-institutions remain “unquestionably strong”.

Since we are explicitly guaranteeing their longevity, setting unambiguously world-class, first-loss equity buffers has never been more important. And the policy solution we have arrived at, which involves taxing the subsidy while requiring banks to have bullet-proof balance-sheets, is superior to that originally proposed by the financial system inquiry, which left the subsidy in limbo. But I must admit surprise at the Australian Bankers Association’s rabid opposition to the levy given the vast bulk of its members (by number) enthusiastically support it, as the likes of Bank of Queensland and Bendigo & Adelaide Bank have made clear. Perhaps those deposit-takers sitting outside the oligopoly would be better served establishing their own independent organisation.

The final crucial point is that the tactical rationale for the government introducing this levy is to save Australia’s AAA rating, threatened by the $13 billion of zombie savings the Senate failed to pass. The loss of the AAA rating would likely have no direct effect on the government’s interest repayments. But it would lower the four major banks credit ratings from AA- to A+, which our research suggests would increase their borrowing costs by about 0.10 per cent annually (notably more than the levy). This point has been missed in the debate: much of the motive for balancing the budget and maintaining a credible 2020-21 surplus is keeping the rating agencies at bay on behalf of the banks, not the public sector. In this manner, Scott Morrison’s explanation that the levy will help with “deficit repair” is absolutely spot-on

First bank to move will have ‘hell to pay’

From The Advisor

The head of a major aggregator says the big banks have plenty of ways to absorb the government’s $6.2 billion levy other than hitting mortgage customers with a rate hike.

Yellow Brick Road general manager of lending Clive Kirkpatrick told The Adviser that the first bank to lift rates in response to the government’s actions will have “hell to pay”.

“The banks have more than one stakeholder involved. The only way they can absorb this tax is by sharing it with either the customer, shareholder or staff member,” Mr Kirkpatrick said.

“To say that the customer will need to bear the uplift is just not right. I heard the Treasurer say that surely out of $35 billion in profit they can absorb $6 billion,” he said. “There are many alternatives available to the banks. The first bank to pass on that tax to the customer will have hell to pay.”

The former head of St. George Bank’s third-party division wrote to Vow Financial brokers last week explaining the potential impact of some of the measures announced in the federal budget. He noted that the bank levy, which applies to Macquarie as well as the big four, could certainly drive up lending costs.

“Fortunately, we have multiple funding sources, so we can continue finding the best deals for our customers,” Mr Kirkpatrick said.

The ACCC has been tasked with holding the major banks to account over their home loan pricing decisions.

The commission’s new Financial Sector Competition Unit will be tasked with undertaking regular inquiries into specific competition issues across the financial sector, starting with a one-year price inquiry into residential mortgage products, which will run until 30 June 2018.

As part of this inquiry, the ACCC can compel the major banks to explain any changes or proposed changes to fees, charges, or interest rates in relation to residential mortgage products affected.

However, YBR’s Mr Kirkpatrick believes the ACCC alone may not have enough power to prevent the big four from lifting their rates.

“But if you combine the strength of the customer bases, the government and the media, that is far more powerful than a single government body,” he said.

“Opinion is a big driver of behaviour. I think the first one to move will see customers vote with their feet. There are plenty of other alternatives.”

All Taxes Are Paid For By Everyday People

The following opinion piece by NAB Group CEO Andrew Thorburn was first published in the Herald-Sun on 15 May 2017: 

Australians make choices every day as to how they balance their own budget, managing their income with the bills they have to pay.

For a family that means if the price of groceries or electricity goes up, they have to decide how those costs will be borne. There is no magic solution to fill the gap – choices have to be made about what to spend less on, what things to go without.

It is the same for any business, large or small, such as a builder, a hairdresser or a coffee shop owner. If their costs go up (or they have more tax to pay), they too need to find a way to manage those costs against their income.

In reality the options are limited.

They can charge more for their services.

They can invest less in the training and development of their employees or make the tough decision to have fewer employees.

Or, as the owner of the business, they can accept less profit in return.

A bank is no different.

When our costs go up we must decide whether to reduce what we spend with suppliers. These include the people who own the properties we lease as branches and business centres; the agencies we pay to advertise our services or the companies that provide and help manage our technology

Or we can increase the rates we charge borrowers or reduce the rates we pay savers.

We must decide whether to invest less in new products and services, or less in our employees – all 34,000 of them who live and work in the communities they serve right across Australia

Or we can decide to return less to our shareholders. These are every day Australians who own shares in the bank either directly or through their super fund

Last week the Federal Government announced how it plans to balance the national budget. We agree on the need to return to surplus – but this must be done carefully and with long-term planning and consideration of the consequences.

So, while the new tax on the major banks might seem an easy solution, the fact is the cost of this tax will be borne by people.

That is because a bank is made up of the everyday people listed above: our customers – the savers and borrowers; our suppliers, our employees and our shareholders.

That is who “the bank” is.

In response to the new tax – $6.2 billion over four years, on top of the billions of dollars already paid by the major banks – it is wrong to state it can simply be absorbed.

The reason is simple. As any family or small business knows a tax is a cost, and a cost must be passed on somehow. No cost can be “absorbed” – even if a family or business is successful and doing well.

It is right to say Australia’s banks are strong and profitable.

And that is a good thing – because strong and profitable banks are vital to the health of any economy.

It means that we can continue to lend to Australian businesses to grow, and to provide loans to people to buy their own home. It allows us to pay our suppliers and our employees; and invest in our own business so we can be better.

But the vast majority of bank profits – in NAB’s case about 80 per cent – are returned to our shareholders twice a year in dividends (the rest is retained to invest in improving the bank and as capital to allow further lending).

So when people say the banks can afford the new tax and don’t have to pass the cost on, they must mean that the millions of retail shareholders – everyday Australians – who are the owners of our major banks can afford it.

For NAB alone, there are about 570,000 direct owners in our company. About 174,000 are Victorians who live in communities like Sunshine, Preston, Mildura and Warrnambool.

Another 161,000 people in New South Wales own shares in NAB, a further 84,000 Queenslanders, 71,000 West Australians, 34,000 people in South Australia, 8500 in the ACT, 6500 in Tasmania and 1500 in the Northern Territory.

Many of these are mums and dads, retirees and pensioners who hold small parcels of less than 1000 shares.

The income these shares pay – $1.98 in dividends for every share, fully franked, last financial year – help these Australians manage their household budgets.

Then there are the millions more Australian workers with superannuation who own shares in the major banks through their super fund.

This new tax will hit all these groups. For all of them it represents a potential pay cut, now or in retirement.

Banks exist to serve and support their customers – the borrowers and the savers. They provide jobs to more than 150,000 employees, and work and opportunity for countless suppliers. They are owned by millions of every day Australians.

The cost of this new tax will be borne by all these people.

Big Bank Levy Is Permanent

ABC Insiders included an interview with Treasurer Morrison and subsequent discussion on the big bank levy announced in the budget last week.

The Treasurer confirmed this is a permanent change to the landscape, and linked it to competitive disadvantage smaller players have relative to the majors, thanks to the implicit government guarantee. He also underscored the excessive profitability of these banks relative to other markets, which speaks to the structural issues we have here.

Subsequent panel discussion centered on whether this was the thin edge of the wedge, and they suggested it was the poor bank culture, and unique situation the big four have which explains the move. These banks have few friends, and there are no community concerns about the impost.

Barrie Cassidy interviewed the Treasurer, Scott Morrison. On the panel: the Financial Review’s political editor Laura Tingle, The Australian’s Niki Savva and political commentator and author George Megalogenis.

Major Banks Down $16 bn This Week

So the net impact so far of the budget liability levy was to knock over $16 billion in market value from the big four, which is more than their most recent combined profit! ANZ fell the most, at 5%, followed by Westpac 4.3%. Macquarie dropped 2.5%.

They have reported a combined $15.6 billion in the half, and up on average more than 6%. Here is the ASX 200 Financials chart for the past 5 years.  They are still fully valued.

Given the overall market index was little changed, the majors are perhaps out of favour. What is not clear yet is whether this is a knee-jerk reaction to the budget “surprises”, or whether the tighter supervision, slowing home lending and rising consumer delinquencies are the root causes.

We think investor home lending is set to slow considerably in the months ahead. The question is how home prices will respond. As a result, the growth engine for the majors will be potentially misfiring. Given the concentration on the local markets, and focus on housing lending, they do not have many other shots in the locker.

 

Budget ignores housing market risks: Moody’s

From Investor Daily.

Tax initiatives introduced in the 2017 federal budget to address housing affordability concerns will do little to alleviate the build-up of “latent risks” in the housing market, according to Moody’s Investors Service.

The federal budget, released on Tuesday, 9 May, outlined a number of changes designed to improve housing affordability, offering tax incentives for first home buyers and tougher rules on foreign investors.

These include allowing retirees to exceed the non-concessional super contribution cap when they downsize their home, creating a new savings account within the super system for first home buyers, limiting foreign ownership in new developments and charging foreign investors who leave properties unoccupied for six or more months a year.

Moody’s noted that these initiatives may prove successful in improving housing affordability over the long-term, but cautioned that an immediate impact on halting the build-up of risk in the housing market was “unlikely”.

“Latent risks in the housing market have been rising in recent years as significant house price appreciation in the core housing markets of Sydney and Melbourne have led to very high and rising household indebtedness,” the ratings agency said.

This increase in household debt coincides with a period of low wage growth and a structural shift in labour markets, Moody’s said, subsequently leading to a rise in underemployment

“Whilst mortgage affordability for most borrowers remains good at current interest rates, the reduction in the savings rate, the rise in household leverage and the rising prevalence of interest-only and investment loans are all indicators of rising risks,” Moody’s said.

The ratings agency cautioned that loan borrowers “are more vulnerable to change in financial conditions” and this put banks at higher risk of losses in their residential mortgage portfolios and “triggering negative second-order consequences for the broader economy”.

Budget 2017: Bank bashing a winner, but tax cuts leave ScoMo exposed

From The New Daily.

The Turnbull government’s budget this week went a long way to neutralising the policy issues that Labor exploited at the last federal election, especially by whacking the big banks. But the government deliberately left itself exposed on the one issue that could bring it down.

The Coalition can now claim to have cracked down on big banks, who have managed to make themselves public enemy number one by treating customers poorly while raking in huge profits and showing inadequate contrition for the shonky operators among their ranks.

It’s impossible to tell definitively which budget measures were the result of rigorous policy analysis within the bureaucracy, and which were cooked up as a quick political fix in the minister’s office.

The deficit levy in 2014 on very high income earners was reported to be a relatively last-minute decision by the Abbott administration to pre-emptively counter accusations that the budget only imposed cuts on students, the elderly and the unemployed.

This year’s levy on the banks could be seen in a similar light, with reports emerging that Treasury officials who met with bank representatives after the budget knew very little about the levy or how it might operate.

The crackdown on banks involves more than just the levy. There is also a new requirement for bank executives to be registered with the industry’s regulator, with the attendant threat that bankers can be struck off the register for misconduct and stripped of their bonuses. Banks found guilty of misconduct will also face increased fines.

The government could argue these reforms would have been the likely outcome of a royal commission.

This of course does not sate the community’s desire for bankers to be subjected to a public inquisition and then metaphorically placed in the stocks or strapped to a crackling pyre.

Even though the government was prepared to reverse its position on a number of other policy issues, such as Gonski, it apparently didn’t see the benefit of conceding to Labor on a banking royal commission.

Perhaps this is because it occurred to Treasurer Scott Morrison that he could discipline the banks while filling a revenue hole at the same time.

It is no secret the Treasurer is unhappy with the banks – and not just because they’re singularly ungrateful for the government’s protection against the indignities of a royal commission.

ScoMo is unhappy because they appointed a senior Labor identity – former Queensland premier Anna Bligh – as their chief lobbyist.

That role had reportedly been earmarked for one of Mr Morrison’s senior advisers, and the Treasurer had apparently given his blessing for the appointment.

Anyone with an ounce of political common sense knows that lobby groups are unwise to appoint someone of the opposite political flavour to the government of the day.

The only exception to this rule is if it’s close to an election and there is a good chance the government will change.

Canberra circles are rife with stories of ministers and their staff not only refusing to meet with such lobbyists, but excluding them from other consultation processes.

Retribution can even extend to unfavourable policy decisions, as the bankers learned on budget night.

The Treasurer would be pretty happy with the outcome of the decision so far.

The bankers are squealing, voters don’t like one of the most trusted political faces in recent history shilling for the banks, and Labor can’t claim any credit for the crackdown.

ScoMo will also be confident in the knowledge that if the banks try to pull a mining tax rebellion – with a multimillion dollar advertising campaign – they will only reinforce voters’ resentment and the resulting backlash will demonstrate just how unpopular the banks are.

Big business tax cuts may be ScoMo’s undoing

However, just as Tony Abbott’s deficit levy didn’t magically make the rest of the 2014 budget fair, the banks levy can’t do the same for this year’s budget.

The decision to double down on promised tax cuts for the big end of town will be an albatross that PM Turnbull carries to the next election.

This is even more the case now that low-income taxpayers will be required to pay the Medicare levy increase for the NDIS and the total 10-year bill for business tax cuts has blown out to $65 billion. This weakness could have so easily been avoided.

The government could have set aside the big business tax cuts until the budget was in surplus (until we can afford it), or the average net tax raised from big corporates exceeded a certain threshold (until they are paying their fair share of tax).

For a budget that was so smart on politics, the decision to keep the tax cut for big business was dumb.

Leaving it on the books simply gives Labor a free kick. No wonder it was the main feature of Opposition leader Bill Shorten’s budget in reply address.

If voters conclude the Turnbull government is no better than the banks in wanting to rip them off, it will be the PM and the Treasurer being dragged to the stocks and the pyre at the next election.

Budget 2017: lack of competition is why government is moving so hard against the banks

From The Conversation.

With it’s latest budget the government has made a number of moves to create a level playing field in the banking system. It’s taxing the five largest banks, announced a review of rules around data sharing, a new dispute resolution system for banks and other financial institutions, and new powers for the regulator to make bank executives accountable.

All of this is on top of a Productivity Commission inquiry into the competition within the Australian financial system, announced this week.

While some of these moves – such as the bank levy – will have a positive effect on making smaller banks more competitive, there are more policies that could be considered. These could include the separating out of the retail arms from the other areas of the large banks, increasing the capital requirements of larger banks to equal those of smaller banks, and developing new sources of funding for smaller banks.

More for competition

A new “one-stop shop” for dispute resolution will replace the existing three schemes – Financial Ombudsman Service, the Credit and Investments Ombudsman and the Superannuation Complaints Tribunal. Called the Australian Financial Complaints Authority (AFCA), it will give consumers, businesses and investors a binding resolution process when dealing with financial services companies. The scheme will provide for a basis for more competition as disputes on financial services are consistently resolved regardless of the provider.

And A$1.2 million has been given to fund a review of an open banking system in which customers can request banks to share their data, which could assist financial startups and other competitors enter the market and compete against the big four banks. Banks will likely be forced to provide standardised application programming interfaces (API) that enable financial technology companies to provide services for interested consumers.

The government has also provided A$13.2 million to the Australian Competition and Consumer Commission (ACCC) to further scrutinise bank competition and to run the AFCA. This follows a House of Representatives report that called for an entity to make regular recommendations to improve competition and change the corporate culture of the financial industry.

The ACCC will provide Treasury with ongoing advise on how to boost competition in the sector. This may include a reduction of cost advantages of big banks, barriers to entry for new firms including change costs for consumers.

A more concentrated and changing finance sector

All of these changes come after a decade of consolidation and upheaval in the financial system, which has hurt competition and increased risk.

This chart shows the market shares of the big four Australian banks in terms of Australian loans and deposits:

Market share Big 4 banks. Australian Prudential Regulation Authority

As you can see, since 2002 their market share has grown from 69.7% to 79.6% for loans and from 66.3% to 77.3% for deposits. Also, the gap between market dominance in loans versus deposits has closed since the global finance crisis. This means the big banks are attracting a greater share of bank deposits, which has an impact on the smaller banks.

With limited access to deposits, which is a relatively cheap way of raising capital, smaller banks have had to rely on the more expensive wholesale debt markets. Small banks also have difficulties to tap other funding sources such as covered bonds. This makes their products less competitive, and they have struggled as a result.

In part, that’s because a number of banks disappeared or merged with the big banks after the global financial crisis. This includes St George, Bankwest, Bendigo Bank, Aussie Home Loans, Adelaide Bank, RAMS and Wizard.

The Murray Inquiry found the big four banks have less than half the capital set aside for emergencies than some smaller financial institutions do. Again, this makes the smaller banks less competitive and needs to be addressed. The government should increase the capital requirements of larger banks to close the cost advantage for larger banks.

In addition, rising house prices have led to a further increase in the concentration of mortgage and other housing loans in the Australian banking system. Today Australian banks have about twice as many mortgages on their books as in the next highest developed economy.

New financial startups, such as peer-to-peer lenders, have entered the banking system. In time they may rival the big banks in areas like personal lending, but they remain small in terms of market share. And the big banks’ unwillingness to share data may be a hindrance.

Something needed to be done

The concentration in the banking sector does not provide the best outcome to all Australians. It has led to a low range and low quality of financial services as well as high costs. This needed to be addressed.

The new banking levy will support competition, as it pushes up the cost for the big banks. The review into data sharing could also be a boon to financial startups and other competitors, although we don’t yet know what the outcome will be.

But even stronger government actions may needed to create a level playing field. The government should consider separating out of the retail arms, from the other areas, of the large banks. Failing that, the low capital buffers of the big banks need to be addressed.

Author: Harry Scheule, Associate Professor, Finance, UTS Business School, University of Technology Sydney