Deposit Tax to Hit Big Four Banks, Exempt Smaller Lenders

The government’s long publicised plan to hit banks with a deposit tax is closer to lift off.

Originally it looked as if the tax reform would apply to all banks from 2016 onwards. But the latest proposal, by Treasurer Joe Hockey, involves an exemption for small banks and credit unions. The plan would leave the big four banks bearing all the brunt of the new tax.

This tax on bank deposits has been in the pipeline for a long time, dating back to the Labor government. It wanted to introduce a 0.05% levy on deposits up to $250,000. Labor forecast revenues of $500 million a year from the new tax.

The plan hasn’t changed much under the Coalition government. The levy on deposits remains the same, as does the original deposit ceiling. But with the Coalition limiting the tax to the big four banks, revenues would come in lower.

The new proposal would see tax revenues fall to $400 million a year. That’s because smaller lenders account for only one fifth of the market, whereas big banks make up 80% of all held deposits.

Saving the banks from themselves

The government scheme is part of the Financial Stability Fund. The fund’s aim is to limit the fallout of a potential banking crash. In theory, the revenues from the deposit tax would help bailout banks in the event of a banking collapse.

But the likelihood of a big four Aussie bank collapsing is slim to none. Our banks are among the best capitalised in the entire world.

That’s why this plan is nothing but a ruse for the government to raise tax revenue.

What Hockey’s proposing is the path of least resistance. By cutting out smaller lenders, the government hopes there’ll be enough political support to push the reform through parliament. The Greens indicated they’d support the tax if it exempted smaller lenders.

But the plan comes at the worst time possible for the major banks.

This year already three of the big four banks have embarked on capital raising schemes. The only that hasn’t announced plans is Westpac [ASX:WBC].

The capital raising is adding to costs for the major banks going forward. The deposit tax isn’t likely to help their situation. As bank costs rise, it’s only logical that they’ll pass it onto customers.

Mr Hockey is too optimistic to suggest that banks won’t punish customers. He feels banks won’t shoot themselves in the foot by doing that because it’d only help smaller lenders.

Unfortunately that’s wishful thinking. You can’t hit banks with a double whammy of capital requirements and taxes and expect them to react positively.

The Australian Bankers Association opposes the deposit tax

Not everyone supports Mr Hockey’s new deposit tax proposal.

The Australian Bankers Association (ABA) thinks the government is only helping itself. For the ABA, it represents another ploy to raises taxes, in order to plug holes in the $40 billion budget deficit.

ABA’s chief Steven Munchenberg believes the big banks will have no choice but to pass on the costs to customers. It’s hard to come to any other conclusion. Mr Munchenberg explains:

The depositors are funding a scheme that would only be of use to depositors at smaller banks given the size of the proposed fund. There’s no reason to do this other than it helps the budget bottom line’.

He’s right that the scheme doesn’t help the big banks. The tax revenues aren’t sufficient to help prop up banks.

Let’s be honest, $500 million a year, in banking terms, is nothing. In the event of a major crash, even 10 years down the line, there’s no way these sums would fix banking balance sheets.

The total assets of the big four Aussie banks, as a percentage of GDP, is 220%. How could the budgeted tax revenues possibly help the big four in the event of an economic collapse? The answer is that they couldn’t. The sums fall well short of what banks would require in a doomsday scenario.

As it stands, the deposit tax is framed as a way to help the big banks’ long term viability. All its doing instead is making them less competitive. And it’s punishing savers, and shareholders, in equal measure. It’ll lead to higher costs, and dividend cutbacks potentially.

But there’s enough political support to push this through in time for the tax to take effect from January 1, 2016.

It’s not been a great few months for ‘big four’ investors. But none of this is a surprise to our experts.

Markets and Money’s Vern Gowdie predicted a tough year for banks in his free report ‘Five Fatal Stocks You Must Sell Now’. You need to read which banks made his blacklist. And he’s also identified one other blue chip stock (not a bank) that’ll catch you by surprise. To find out how to download the report, click here.

Mat Spasic,

Contributor, Markets and Money

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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