Banks told to absorb levy costs

The stoush over Labor's bank-deposit levy is heating up, with Treasurer Chris Bowen suggesting big lenders absorb the cost after benefiting from taxpayer guarantees since the global financial crisis.

As the industry peak body called for the 0.05 per cent levy to be scrapped, Mr Bowen said big banks could choose to cover the cost as a "modest" contribution to a deposit guarantee that had helped them make collective profits of $92 billion over the past four years.

The levy, announced as part of a mini-budget on Friday, is forecast to raise about $500 million a year, to be put in a fund to pay depositors in any future bank collapses.

Banks argue the impost is unnecessary and will be passed on to customers through lower deposit rates.

Mr Bowen conceded the cost might be passed on to savers, but also said lenders could choose to absorb the levy after the sector's run of bumper earnings, which were supported by the government's move to guarantee deposits in 2008.

"I want big and strong and profitable banks, but the big four banks have had profits in excess of $92 billion collectively over the past four years," Mr Bowen said. "One or more of them could make a decision to absorb that cost."

Mr Bowen argued the banks' recent success had been helped by the government's move to guarantee bank deposits free of charge during the global financial crisis.

"With all seriousness and respect to the banks ... this government stepped in during the global financial crisis and made an important step to guarantee bank deposits. More than one person has pointed out it was absolutely vital to the survival and prosperity of our banks," he said.

Under the policy, a levy of 0.05 per cent will be placed on all deposits below $250,000 that are guaranteed by the government from 2016.

This rate is equivalent to 5¢ for every $100.

It comes after the government stepped in to guarantee bank deposits up to $1 million at the peak of the global financial crisis in 2008. The upper limit of the guarantee has since been cut to $250,000.

Top financial regulators have backed the levy, but it remains contested by much of the industry.

Chief executive of the Australian Bankers Association Steven Munchenberg said no depositor had suffered from an Australian bank failure since the 1890s.

Depositors here had more protection than overseas, he said, and warned that banks would react to the change by cutting the interest rates paid on deposits.

"This comes at a time when Australians are saving more but returns are less in this low-interest-rate environment."

There are also concerns the new levy may crimp competition.

JPMorgan analysts said the fee would take a bigger chunk out of Bank of Queensland and Bendigo and Adelaide Bank's earnings than the big four, as the big banks obtain a smaller share of funding from deposits.

The Customer Owned Banking Association said the levy should be restricted to the big four, and Mr Bowen he would ensure the levy did not hinder competition, sparking some uncertainty in the industry over whether the policy might be changed.