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Banks reeling from budget levy

by Matthew Smith | 10 May 2017
The federal government has shown its political hand with the release of the Federal Budget this week.

#1 Banks reeling from budget levyWhat’s been labelled as Treasurer Scott Morrison’s “reset budget” — following the politically disastrous budget two years ago led by former Treasurer Joe Hockey — aims, with a new levy on banks, to tap into the underlying scepticism the general population feels for banks’ out-of-cycle interest rate rises amid record profits.

On Tuesday the government announced plans to raise $6.2 billion from the nation’s five biggest banks over the next four years, imposing a 6 basis point levy on liabilities over $100 billion.

Senior professionals in FINSIA’s network within Australia’s largest financial institutions believe this budget measure could serve as a lesson for policy makers by showing just how integrated and indeed integral the banking system is to Australia’s broader economy.

“There will likely be a lot of consequences unknown or unintended by policy makers stemming from this levy,” one senior professional within FINSIA’s network at one of the big four banks, comments.

Senior professionals were reticent to make on the record statements in the early aftermath of the budget announcement on Tuesday evening, but their views are along the lines of the points raised by the Australian Bankers Association, which issued this release on Tuesday night.

Possible reduction of bank share dividends; lower deposit rates; higher borrowing costs – these were among the possible actions mentioned by commentators and banking analysts to account for the new banking levy following the government’s announcement.

Less immediately obvious areas banking professionals believe the levy could permeate the system and the economy more broadly include areas such as the repo [repurchase agreement] market, where banks create liquidity by buying and selling government bonds.

Also, the professionals mention a possible impact on bank staff and suppliers of services to banks, which could be affected as provisions are made for the levy.

The measure won’t extend to foreign banks, superannuation funds or insurance companies.

The big four bank stocks took a hit following the budget announcement, dropping between 3 – 4 per cent in trading during Tuesday but bouncing back on Wednesday.

“I think it could be a good time to be a foreign bank in Australia at the moment,” one senior banking professional comments.
 

Cracking down


It appears Morrison was paying close attention during the recent parliamentary inquiry when bank executives were grilled late last year and early this year, particularly relating to accountability of bank executives, poor customer outcomes and competition concerns within the close-knit banking community.
 
A new financial complaints authority will emerge from the budget, designed to adjudicate binding outcomes for disgruntled customers.
 
Meanwhile, the budget outlines, senior bank executives who fail to register properly can be disqualified from their positions and stripped of bonuses.
 
In parallel with the budget announcement, Morrison also announced that the Productivity Commission would kick off a review of the financial system, foreshadowed here by InFinance in lieu of a full-blown Royal Commission, which the Labor Party has been calling for since the financed industry-healed Malcolm Turnbull took on the nation’s top job.
 
It is believed the Productivity Commission is already poring over the government’s request, which is understood to specify an investigation into the banks’ and financial institutions’ vertically integrated business models, in which institutions distribute financial products through their wealth management arms.
 
The ‘Terms of Reference’ for the inquiry weren’t available before InFinance’s deadline, but are expected to appear on the Productivity Commission’s website.      
 

What about innovation?


What’s notably missing from this budget announcement — especially when compared to Prime Minister Malcolm Turnbull’s first budget last year — is innovation-funding and incentives for startups.
 
While the government noted in this budget it plans to encourage new players in the banking sector by loosening restrictions around capital requirements for aspirants, the buzz around fintech that was a centerpiece this time last year is missing this time around.
 
InFinance covered a speech by shadow treasurer in the days leading up to the budget reveal, in which he contrasts the lack of support for startups in this year’s budget, here.
 
Loosening restrictions on capital requirements for startups wanting to get a foothold in the banking industry would be inline with progress made in the UK by the Prudential Regulatory Authority over there, a topic outlined recently in InFinance.

The road ahead


Leading up to the budget announcement, infrastructure was one of the areas to watch for the finance and banking industry and senior professionals still have questions following Tuesday night’s reveal.
 
Morrison talked about the federal government taking control of projects including the slated airport at Sydney’s Badgerys Creek and an inland rail link leading up to the announcement.
 
Now it’s confirmed the federal government will take responsibility for infrastructure away from the states, it’s not clear to the industry how this will involve the private sector.
 
“It’s the states with the expertise working on PPPs [Public Private Partnerships] and working with the private sector, now it’s the federal government saying they’ll be taking over? It’s hard to see whether they have the relationships and the skills,” one senior professional notes.
 
The government’s infrastructure priorities are outlined here.

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