Martin North from Digital Financial Analytics talks about whether there will be an inter-bank funding levy, and if there is, would it be passed on to consumers?
Could there be a bank levy?
Ross Greenwood: With a significant charge that is almost a levy of some $6 billion it’s suggested that went through the markets today, the all ordinaries index of Australian shares dropped by 23 points. Aussie dollar right now 73 and three-quarter US cents, but it was the bank shares that got clobbered. The commonwealth bank down 3.85% to 82 dollars and 2. Westpac down 3 and a half percent, $32.88 and also the A&Z down 2.64% $29.16. Let’s try and explain what this levy might be. Martin North from Digital Financial Analytics starts our program this evening. Many thanks for your time Martin.
Martin North: Hi there.
Interview with Martin North, Digital Financial Analytics
Ross Greenwood: Can you just explain to me first up just exactly what type of a levy could this be that the banks are hit with?
Martin: It’s pretty vague at the moment, but it’s some sort of interbank levy. That would suggest that it’s to do with transactions between banks rather than between banks and their customers. You could regard it as a version of the financial transaction tax which is being mooted around the world as one of the new sources of potential revenue to help fill some of the tax gaps that are around the place.
What it really is doing is putting an extra charge on the interbank transactions which essentially means that banks will be perhaps a little bit more cautious when they transfer money between banks or trade between banks. But also it’s quite a neat way of effectively sucking more money back out into broader budget.
Ross Greenwood: It would be also fair to say that the banks themselves are not necessarily the most popular group in our community right now. They’re pretty soft targets, given the fact they make more than $30 billion a year. To be able to take money out to potential fund the national disability insurance scheme, or victims of any form bank abuse. These would be pretty convenient things for the governments to come out with if they have the neat trick of hitting the banks, and not the bank’s customers or shareholders.
Martin: That’s certainly true. I mean if you look at the history of last year or so there’s been a whole bunch of inquiries and all those sorts of things. I think you’re right the banks are a soft target. But just be a little bit careful about that, right? Remember that six billion over four years right? If you work that out on what it means per annum, that’s about 5% of the major bank’s annual profit. It’s quite a big number.
Now if you translate that into what it might mean, it means that effectively the banks would potentially need to put their mortgage rates up. The question then becomes is, is there sufficient competitive pressure in the Australian banking system to stop that happening? Or will essentially those taxes flow back through and essentially end up with higher mortgages.
Customers to ultimately bear the increase
Ross Greenwood: What you’re saying is ultimately regardless of what takes place, unless there is sufficient competitive pressure that it’s a customer that ultimately would bear any increase in tax on the banks.
Martin: Yes. That’s my view. Essentially the banks have this amazing ability to be able to prop up their business. Essentially, by repricing their loans. If everybody does it at the same time, independently of course, essentially the market is such that effectively consumers end up paying.
If for example recently we’ve seen all the banks put their rates up for investment mortgages in particular. But of course, the SME loans are also going up below the waterline there. There’s this question as to whether it will really just flow through and hit the good old consumer once again.
Ross Greenwood: Martin North from Digital Financial Analytics starting our program. Our special budget coverage will be going right through until 9 pm this evening. Martin, we appreciate your time.