Will the new tax on banks disrupt financial markets?

Commonwealth Bank of Australia (CBA) and National Australia Bank (NAB) have both warned that the new $6.2bn bank levy issued by Treasurer Scott Morrison during last Tuesday’s budget would cause “severe distortions” in financial markets, including the risky derivatives market and the RBA’s interbank lending market.

The lenders have called for a wide array of carve outs from the proposed levy following a series of meetings between Treasury officials and the banks’ chief financial officers last Thursday.

Ian Narev, CEO of CBA, said his bank would continue to express its concerns about the surprise levy, as it would slap a 0.06% tax on banks with liabilities in excess of $100bn.

Over four years, the levy would raise $6.2bn from the Big Four and Macquarie Group. These lenders collectively generate around $30bn annually in profits after tax. About three-quarters of these profits are paid out to shareholders.

“Australia’s ongoing prosperity depends on all stakeholders working together cooperatively to ensure that our banking system remains strong and fair. To that end, we must be, and will be, prepared to speak openly about policies that could weaken our banks,” Narev told The Australian Business Review. “However, we are committed to working constructively with the Treasury to ensure that, even if this is bad policy, it is implemented as well as possible”.

Gary Lennon, NAB’s chief financial officer, said being asked by the federal government to provide feedback on the levy “in just two business days is highly unusual and reflects poorly on Australia’s public policy-making process”. Lennon has requested the government produce a regulatory impact statement as well as a period of consultation on the draft legislation.

CBA confirmed that the government brought in the levy for four reasons:

  1. To assist a return to surplus
  2. To complement other policies designed to make the banks stronger
  3. Level the playing field for smaller banks
  4. Charge for the subsidy provided by the implicit government guarantee

Both Narev and Lennon said the government should include a sunset clause on the levy in the event of a budget surplus, and asked that the levy be set at a fixed rate. “It is not appropriate for the levy to become an ongoing tool for governments to fill budget gaps at the expense of the banking industry,” Narev said.