Banks face tough time slamming door on insurance salesman

It comes as no surprise that banks and their depositors are pushing back at the federal government's plan to apply a levy on bank deposits to fund the unlikely need for bank bailouts.

The government will sell this as an insurance levy, but the banks will spin it as a tax and their customers will also see it that way.

The banking industry has been bracing itself for a tax ever since Kevin Rudd introduced the super tax in the mining industry. Like the miners, the banks didn't get much notice or consultation. But unlike the miners, the bank deposit levy is not a hefty impost.

And over the next few months as the big four banks produce yet another set of record profits there will be public calls for them to absorb the levy rather than pass it on to customers.

To be fair the government has a reasonable point, at least in theory. Many other international jurisdictions impose this kind of levy and it was a recommendation made by the Council of Financial Regulators.

The merits of his yet to be released policy depend firstly whether it's needed and whether it will be useful. A levy of 0.05 per cent of deposits would barely touch the sides in the event of a collapse. And it won't begin until 2016.

The Australian banking industry takes the view that we shouldn't be compared with other countries because we have a track record for being one of the safest and best regulated banking markets in the world, and thus don't need to insure against the worst-case scenario. The industry's argument says the chances are infinitesimally small, citing the most recent incidence of a bank short changing its depositors being back in the 1930s when depositors of Rural Bank were wiped out.

Since the global financial crisis we have seen some very small institutions come close but to date they have been bought out by others. The unofficial takeover/bailout has worked to date but can't be relied on.

The government currently guarantees deposits up to $250,000 for authorised deposit-taking financial institutions - a move put in place at the height of the financial crisis to instil confidence in the banking system.

When this scheme was put in place, those with deposits over $1million were able to pay a levy to to secure their savings but virtually no one took up the offer.

On Thursday the sharemarket reacted violently to the speculation that the levy would be up to 1 per cent per year of deposits up to $100,000 and would raise more than $5 billion. It sent bank stocks into a tail spin amid calls of Cyprus revisited.

The story was later corrected, but some confusion remained.

The banks don't like the idea of any form of fee that provides a disincentive for customers to save via bank deposits.

Their response will be that investors will be diverted to riskier asset classes like shares or corporate bonds or property. That is a slightly hysterical claim.

Banks have been on a crusade since the global financial crisis to attract more money into their deposit accounts as a safer means to finance the loans they make to customers, rather than rely on the more volatile international wholesale markets.

It's a strategy that has been supported and rewarded by ratings agencies and regulators.

They bristle that the government's move was delivered as a fait accompli and without consultation beyond a letterbox drop to the Australian Bankers' Association a few days ago.

However, individual banks are being very careful not to be seen to be making too much fuss despite the fact that one described the move as having a gun pointed at its head with the threat that the deposit levy could be raised further.

Banks take the view that it's a government revenue-raising exercise, the proceeds of which will be counted in forward estimates.

It's an issue that National Australia Bank chief executive Cameron Clyne was not prepared to buy into on Thursday during a public address in Sydney.

He told the media: "I'll give you two options. Option one is I'll make an ill-informed, smart-alec response without all the facts. Option two is I will research the information, I will meet privately with Treasury officials to understand their thinking, and I will make an informed comment. You want the former, I'm doing the latter."