Bank safety belt or strapping belt?

At face value, the levy on banks to pay for the government guarantee of deposits being mooted today doesn’t look unreasonable, albeit that it is occurring amidst the Rudd government’s mad scramble to raise cash to preserve some semblance of fiscal responsibility in the lead-up to the election.

The Australian Financial Review today reported that the government was looking at a levy of between 0.05 per cent and 0.1 per cent on deposits to raise up to $1 billion over the forward estimates, which would be badged as an insurance premium against any future bank bailout. At present the government doesn’t charge for its taxpayer guarantee of deposits up to $250,000.

In concept deposit insurance isn’t a particularly contentious issue and in many countries there are already industry-funded schemes. Indeed the Bank of International Settlements, the organisation for central banks, has advocated the introduction of such schemes, arguing that blanket guarantees could have unintended consequences in the form of distortions within financial systems or moral hazard.

Introducing such a scheme in the run up to an election, however, would invite cynicism.

The government plans to tax cigarette smokers to raise an extra $5.3 billion over the forward estimates are being presented as a health measure when everyone knows it, and the very destructive $1.8 billion smash-and-grab raid on the salary packaging industry without consultation that has destabilised the entire automotive sector, is about trying to retain some vestige of fiscal credibility as the budget deficits continue to blow out.

If Rudd were to introduce a proper insurance scheme (or, given that it is unlikely to resume before the election, issues another press release outlining Labor’s intentions should it retain government), then where the ‘premiums’ were invested in a fund at arms-length from government and allowed to build up so that they could eventually cover the cost of a bank failure, it would be difficult to argue against it. It would also help if the concept were put up for proper public consultation and debate.

If, however – as appears to be the case – the levy concept is about shoring up recurrent revenues, then it would be just another tax hike and taxpayers in future would still be exposed to the full impact of a bank failure. It would be a new tax, not an insurance scheme.

As it stands, of course, taxpayers do play a role in guaranteeing deposits up to $250,000 but it is a transitory one. If a bank were to fail the taxpayers would fund the replacement of those deposits but would be repaid from the liquidation of the institution and, if there were still a shortfall, from a levy on the industry. So ultimately, the industry already self-insures to a large degree.

While a real insurance premium would level a few playing fields between bank deposits and other fixed interest securities, however, it isn’t the banks that would end up paying any new levy or tax and, despite the nasty stock market response to the reports today, it is unlikely that bank shareholders will bear much, if any, of the cost.

As it would have to apply to all authorised deposit institutions regulated by the Australian Prudential Regulation Authority, including a number of non-listed mutual-type institutions, the bulk, if not the entirety, of the costs would inevitably be passed onto bank customers.

Logically depositors, as the beneficiaries of the government guarantee, should foot the bill in proportion to the size of their deposits.

Given the banks, having experienced their vulnerability to wholesale debt markets during the financial crisis, are trying to increase the proportion of deposits in their funding – and are being effectively forced by the new regulatory settings to do so – that’s probably unlikely to happen in today’s low-rate environment.

More likely there would be a sharing of the costs between depositors, borrowers and, perhaps, shareholders (if all ADIs had to fund the tax it could be fully passed on to customers without any impact on individual competitiveness).

In other words, customers would be taxed, not to create an insurance scheme, but to create another revenue source for a cash-strapped government.

It is worth restating that unless parliament is recalled the changes to the treatment of the fringe benefits tax on employer-provided vehicles, the increased excise on cigarettes and the mooted tax on deposits – and, almost inevitably, other tax increases and withdrawn concessions – are just election policies that may or may not be implemented if the Rudd government were to be returned.

It is obvious, however, from the decimation of McMillan Shakespeare shares when the FBT changes were unveiled and the belting bank shares took today, that the market is capitalising their impact as if the election policies were fact.

This could be a quite destructive little pre-election period.