A mild rally in bank stocks on Tuesday afternoon made up a small amount of the losses incurred since Treasurer Scott Morrison’s federal budget included a bank tax to raise $6.2 billion over four years.
After the blip in share prices, investors in the big four banks are sitting on cumulative capital losses of about $35 billion since the bank tax became public. They are facing more pain if the leaders of the big four banks do what they are told and do not pass on the cost of the levy to customers.
If customers don’t pay through higher interest rates or lower deposit rates then shareholders will carry the burden through lower dividends. The only other alternative is that bank employees pay through large-scale job losses.
Westpac said last week the $260 million after-tax cost of the tax would be equivalent to about 8¢ a share, or 4.5 per cent of dividends paid. Similar cuts in dividends would apply at the other banks.
But if the banks bow down to Morrison’s wishes and make shareholders pay it will undermine one of the objectives of the tax, which is to boost competition.
Morrison made it clear in his second reading speech for the Bank Levy Bill 2017 that the tax was designed to boost the cost of funding of the big four banks and Macquarie Group, and thereby make smaller banks more competitive.
But there will be no competitive boost if the big banks make shareholders pay the tax and keep the status quo on loans and deposit rates.
Unfortunately, his list of achievements is contradicted by the reality. He claims a reduction in regulatory barriers for new entrants, but the number of new entrants can be counted on one hand.
He boasts about the regulatory sandbox to support innovation, but seems to have forgotten only one party has used it.
He says the new Crowd Sourced Equity Framework is helping to get new businesses off the ground, but it is generally recognised that the rules are so restrictive it will flop.
The claim that open banking will empower consumers seems to ignore history. For three decades, consumers have been happy to stick with one main financial institution.
Another glaring contradiction is inherent in Morrison’s other key objective, which is to ensure the banks have “unquestionably strong” levels of capital. The three most important tools the banks have for lifting capital are organically generated retained profits, shares as currency for raising capital and dividends reinvestment plans.
Morrison has successfully slammed all three of these options with his bank tax. Retained profits get cut by $1.5 billion a year, share prices have already been smashed and, assuming the bankers kowtow to Morrison, dividends get cut.
These facts have not stood in the way of Morrison claiming that the tax helps make the financial system more resilient.
In a bid to provide every possible bit of evidence in support of the tax, Morrison points to the competitive advantage gained by the big four banks from their use of internal ratings-based models that allow them to reduce the capital they hold.
He conveniently leaves out the fact that the banks have invested billions in technology systems to achieve these credit assessment systems and the smaller banks have not. That is why the smaller banks are using standardised risk weights for calculating capital.
The bank tax legislation rightly copped a beating from Robert Deutsch at the Tax Institute, who said it is law by ministerial decree, with most of the hard work done by legislative instrument.
“At any given time, the relevant minister will have the power to work out a range of matters relating to the calculation of the amount to which the bank levy will apply,” Deutsch said.
In other words, the government is saying, “generally this is how you work it out, but the minister can tell you what the precise rules are as we go and can even change the rules as he or she has previously applied them”.