Co-ops push franking credits as insurance

Credit co-operatives have called for debate on a proposal to allow the sector to use its $1.5 billion stockpile of franking credits to help fund the planned deposit insurance scheme.

Smaller banks and credit unions, which rely more on deposit funding than large banks, are likely to be disadvantaged by a 0.05 per cent levy on guaranteed deposits from 2016, experts say.

In response, Professor Kevin Davis, from the Australian Centre for Financial Studies, has suggested lenders be allowed to use franking credits to fund their contribution, rather than cash.

Franking credits, distributed with dividends, are tax credits granted to shareholders when companies have already paid tax on their profits.

The big banks have billions in accumulated franking credits but would be unlikely to use these to fund the levy because the credits are a hit with shareholders.

Most customer-owned banks, on the other hand, are unable to distribute franking credits to their members, causing them to build up.

Damien Walsh, the managing director of customer-owned bankmecu, said the lender had about $75 million in franking credits, and Professor Davis' suggestion had merit.

Mark Degotardi, head of public affairs at the Customer Owned Banking Association, estimated the sector had $1.5 billion in accumulated franking credits, and it was adding $150 million to $200 million of the credits a year.

Both Labor and the Coalition plan to introduce the levy on bank deposits, which is forecast to raise about $500 million a year.