Investors have been spooked by a government plan to impose a new levy on bank deposits, in a move that is forecast to raise $733 million in its first four years and help Labor's pledge to balance the budget.
Big bank shares bucked the trend to fall on Thursday - losing as much as $9 billion of their combined value - as it emerged the government was planning the levy to fund any future bailouts.
From 2016, the year in which Labor has said the budget will be back in the black, it plans to introduce a 0.05 per cent levy on government-guaranteed deposits of less than $250,000.
Money raised would be placed in a government-managed fund - and could only be used to refund depositors, not for other types of spending.
At the same time, however, the funds raised would help to enhance the budget's bottom line in the same way that funds deposited in the Future Fund help the budget. It comes after heavy revenue write-downs in recent months.
The Reserve Bank and the International Monetary Fund support the levy being introduced because it would help the government meet the cost of a bank failure, with such schemes common internationally.
Reserve governor Glenn Stevens said in a March letter to then treasurer Wayne Swan that the move should be a priority as it would help "the government for the risks it bears from these guarantees".
Treasurer Chris Bowen is expected to announce the changes as part of the government's economic statement as soon as Friday.
Chief executive of the Australian Bankers Association Steven Munchenberg said he had met with Mr Bowen on Thursday to discuss the plan, which was opposed by banks.
Mr Munchenberg argued that depositors in Australian banks had not lost any money since the Great Depression of the 1930s, and the sector was already grappling with a swath of new regulations. "We just don't think it's necessary. The argument that we need to do it because others around the world are doing it does not hold water."
He said the higher cost would ultimately be passed on to depositors - but the government is set to argue it would cut income from a $10,000 deposit by just 50¢ a month.
Under the current scheme - introduced at the height of the global financial crisis - all deposits of under $250,000 are guaranteed by the government in the event of a bank collapse. But unlike most insurance schemes overseas, Australians receive the guarantee free of charge.
There is $1.6 trillion in deposits in the Australian banking system, of which about $600 billion is held by households.
Bank shares reacted violently to initial reports - later corrected - of a levy of up to 1 per cent, falling by almost 3 per cent in early trade before finishing the day down about 1.5 per cent.
Deutsche Bank analyst James Freeman said the levy would have a small impact on big bank profits, cutting earnings by about 0.5 per cent. He said banks would try to recoup the cost by cutting their deposit rates, but the levy would damage sentiment towards the sector.
"Whilst the financial impact appears to be small, we think the bigger impact will be on sentiment, with the natural question to be whether this is the thin edge of the wedge from a financial regulation perspective, with potentially more onerous regulation to come."
Regulators including the Australian Prudential Regulation Authority and the Reserve Bank last year discussed the advantages of such a scheme with the government, but also noted the idea would be branded a tax.
Mr Bowen said the government had "no plans to tax banks".
How deposit guarantee schemes compare
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