In the grip of a global bank siege

The global banking industry is finding itself under siege as politicians, grasping for ways to boost economic growth and cure their gaping budget deficits, are increasingly attracted to the prospect of higher bank taxes and greater regulation.

In Australia, Treasurer Wayne Swan has turned up the heat on the banks, warning them that he will pressure them to pass on any interest rate cut that the Reserve Bank makes at next week's board meeting. Australian banks, he argued, could well afford to pass on the interest rate cuts because they are highly profitable institutions, which enjoy a much higher return on equity than banks offshore.

Shadow Treasurer Joe Hockey has also waded into the debate, proposing that the Reserve Bank should act as an independent referee on whether the banks should pass on interest rate cuts. Although the central bank's decision would not be binding, it would provide important analysis that would provide a factual basis for the debate.

Australian bank bosses have been quick to take umbrage at what they see as 'bank bashing' from Canberra. They argue that strong, well-capitalised banks are extremely important to the health of the economy, particularly at a time of growing international uncertainty. The bankers' arguments were strengthened overnight after ratings agency Fitch said it was putting the country's big four banks on review for possible downgrade because of the soaring cost of raising funds offshore.

But the problems of the big four local banks are minor compared with their offshore counterparts. On Sunday night, French President Nicolas Sarkozy delivered a blow to the French banks by unveiling a new 0.1 per cent tax on all financial transactions. The new tax, which will begin in August, is expected to raise €1 billion in revenue each year, which will be used to reduce the French budget deficit.

"What we want to do is provoke a shock, to set an example”, Sarkozy explained on French television on Sunday night. "There's no reason why deregulated finance, which brought us to the current situation, can't participate in the restoration of our accounts.”

Investors responded to the new tax by dumping French bank shares overnight, with the share price of BNP Paribas plunging 7.1 per cent while Socit Gnrale fell 6.5 per cent.

But if investors are worried about Sarkozy's transaction tax, they've got even more to fear from his Socialist rival, Franois Hollande.

Hollande, who is leading in opinion polls, not only wants to impose a financial transactions tax, he also wants to separate the banks' commercial and investment banking operations, make them pay a higher tax on their profits and ban them from operating in tax havens.

Meanwhile, Europe's banks – which are heavily laden with Greek loans – are facing the prospect of even heftier losses. Last October, Greece's lenders agreed to write off 50 per cent of their loans – or about €100 billion – to the debt-riddled economy.

But in negotiations over the weekend, lenders appear to have been strong-armed into agreeing to interest rate cuts which would see the long-term value of their Greek bonds reduced by slightly more than 70 per cent.

Meanwhile, in the United States, bankers are battling a last-ditch fight against key components of the Dodd-Frank Act, which aims to prevent future financial collapses by imposing regulations on the banks.

Bankers are lobbying regulators to exempt their overseas operations from new rules on derivatives and swaps trading. They're also fighting back against the proposed Volcker rule regulations which would prohibit banks from "proprietary trading” – making big bets on their own account. US banks complain that it is difficult to distinguish between trading for their own account and buying and selling on behalf of clients.

Ironically, US bankers are finding support from offshore. European regulators are worried that the Volcker rule could stop US banks from buying and selling European bonds, which would make liquidity even tighter. The United Kingdom, Japan and Canada have raised similar concerns.