Smaller banks may be hit by new tax hike, customers could pay

William Jolly By on June 6, 2019
 
Tax hike customer owned banks

Photo by Galen Crout on Unsplash

The Treasury has proposed new bank levies which could cause smaller banks to pay more and big banks to pay less.

Under the new proposal, financial institutions with fewer assets could have their bank levy increased by more than 25%, while those with assets of more than $100 billion will see their levy decreased.

The big four could see a $3 million reduction in their levies.

Asset base$50m 
($’000)
$500m 
($’000)
$5b 
($’000)
$25b 
($’000)
$100b 
($’000)
$800b 
($’000)
2017-1810.525.0250.31,251.74,092.211,738.0
2018-1915.526.1261.11,305.54,025.511,203.9
2019-2015.533.6336.01,678.03,940.010,520.0

The levies paid by financial instituions according to their asset base. 

Source: COBA, Commonwealth Treasury.

The purpose of these levies (called the Financial Institutions Supervisory Levies (FSIL)) is to recover most of the operational costs of the Australian Prudential Regulation Authority (APRA).

According to the Treasury, APRA’s total budgeted costs for 2019-20 are up 26.6% from 2018-19, with additional funding required for “new and expanded functions” and “Government response to the Royal Commission”.

Customer Owned Banking Association (COBA) CEO Michael Lawrence said the intended changes make “no sense” given it was primarily the misconduct of the major banks that prompted the need for increased resourcing for APRA in the first place.

“Customer-owned banking institutions have not engaged in the misconduct examined by the Royal Commission but now face being forced to ‘pay the price,” Mr Lawrence said.

“These proposals send a very confusing signal about the Government’s intention to hold the major banks accountable for their conduct.

“Major banks already have a head start on their smaller competitors through various aspects of the regulatory framework. They don’t deserve the extra help of a cut in their APRA levies while their much smaller competitors are hit with huge increases.”

Mr Lawrence urged Treasurer Josh Frydenberg to rule out what he labelled “grossly unfair increases”.

“The Productivity Commission describes the banking market as an established oligopoly where the four major banks hold substantial market power and this is substantially supported by regulatory settings which contribute to the major banks’ structural advantages,” he said.

“Sharply increasing levies paid by smaller banking institutions while reducing levies paid by major banks will make a bad situation worse.”

These levies are not yet confirmed – submissions can be made to the Treasury until 14 June 2019.

What do the proposed changes mean for consumers?

So what effect, if any, do bank levies have on the pockets of the everyday person?

Well, higher bank levies often result in the extra costs being passed onto customers, whether that’s in the form of higher home loan interest rates, lower savings or term deposit rates or increased fees on products.

There’s precedent for this. In mid-2017, a ‘major bank levy’ was introduced by the Turnbull Government on banks with over $100 billion in assets.

The levy was 0.015% per quarter on the balance on a bank’s liabilities, and was expected to raise around $1.6 billion per year.

However, the big banks unanimously declared their customers would bear the brunt of this extra tax, while smaller bank representatives, such as COBA, approved the decision.

Here’s what some key stakeholders said back in 2017 when this was announced in the Federal Budget:

“The proposed levy on major banks is an attempt to reduce the unfair funding cost advantage enjoyed by the biggest players. The levy will go some way to reducing this unfair advantage.”

COBA Senior Manager Daniel MCDougall

“This tax is borne by the people. It is not possible to impose a tax without an impact on people, and therefore the wider community.”

Former NAB CEO Andrew Thorburn

“The reality is this is a tax on the millions of ordinary Australians who are bank shareholders and bank customers.”

ANZ CEO Shayne Elliot

“The cost (of this tax) is ultimately borne by shareholders, borrowers, depositors, and employees. It is disappointing that the Australian Government has implicitly favoured large foreign banks over Australian banks operating in their home market.”

Westpac CEO Brian Hartzer.

Now the shoe is on the other foot, and it’s well within the realm of possibility that smaller banks may pass on their increased tax bill to customers.

This, together with the plethora of institutions dropping rates in the wake of this week’s RBA rate cut, could well make comparing banking products in the market more important than ever.

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William Jolly
William Jolly joined Savings.com.au as a Financial Journalist in 2018, after spending two years at financial research and comparison website Canstar. In William's articles, you're likely to find complex financial topics and products broken down into everyday language. He is deeply passionate about improving the financial literacy of Australians and providing them with resources on how to save money in their everyday lives.

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