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BFCSA: Banks whinge that the new tax creates many dangers for economy - it creates disincentives to fund loans

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Banks warn new tax creates many dangers for economy

Australian Financial Review May 15 2017 9:50 PM

James Eyers

 

The government's bank tax is inconsistent with regulators' desire to create safer banks because it creates disincentives to fund loans with high quality and longer term borrowings and to provide liquidity to the financial system, the big banks have warned Treasury.

After Treasury was not able to answer their questions on the shock $1.5 billion a year bank tax in the wake of the federal budget, the banks have provided submissions on Monday that illustrate the challenges the government has to design a law that does not introduce unintended consequences.

Commonwealth Bank of Australia raised the prospect of "implementation failure" if the introduction of the legislation is not pushed back to September 30 because a new reporting template will need to be built given existing forms don't capture the liabilities the subject of the tax.

ANZ Banking Group said the tax will increase funding costs, lower returns for shareholders, reduce the banks' international competitiveness and create potential regulatory conflicts. ANZ boss Shayne Elliott said the banks needed more details about the levy. "This idea that the tax can be absorbed by the bank is largely nonsense. It has to be paid by somebody," he told an Australian Shareholders Association conference in Melbourne on Monday afternoon.

CBA warned the Reserve Bank of Australia must be consulted on the design of the levy, given its potential to "impact on the functioning of the monetary system".

Australia's largest bank also wants the tax to distinguish between short-term debt and long-term debt and argues the scope of liabilities to which it applies should be narrowed, so it does not create a disincentive to provide liquidity to the nation's financial markets.

"The levy will constrain our ability to participate in interbank lending and Reserve Bank of Australia market operations," said CBA's submission signed by chief executive Ian Narev.

By adding a 6 basis point cost to the funding of high-quality liquid assets, the levy creates "a disincentive for us to hold more than the minimum amount" of such assets, CBA said. This runs "counter to our discussions with APRA in relation to holding a buffer above the minimum [liquidity coverage] ratio". National Australia Bank also wants the levy to exclude high quality liquid assets, while ANZ said exemptions should be made for liquidity buffers held to meet regulatory requirements.

CBA also said the levy should concessionally tax long-term debt, like it does in the UK, to encourage the banks to hold this over short-term debt, a requirement of the 'net stable funding ratio' also being implemented by APRA.

Meanwhile, Westpac Banking Corp said funding transactions such as repurchase agreements (repos) with the RBA, which provide liquidity for the financial system, should be excluded from the levy.

"Application of the levy to these transactions will increase the cost of execution, deter market participation, reduce market liquidity and adversely impact functioning of the payments system," warned Westpac.

Westpac also said if the levy is applied on interbank cash and short term money market transactions, as is currently envisaged, "there is a real risk that this would limit the number of transactions entered into. This would impact the liquidity of these markets, which are essential for a healthy financial system and for the efficient conduct of monetary policy."

Other banks also pointed to the need for the scope of the bank tax to be narrowed to make it consistent with the direction of both global and domestic regulation.

National Australia Bank said applying the levy on inter-company balances "generates an incentive to reduce their size" which could be "inconsistent with the policy objective of 'unquestionably strong'" banks. As an example, it pointed to its internally-generated residential mortgage backed securities (RMBS) trusts, which are essential to meet Basel liquidity requirements and to diversify the funding base, and said it was essential these be excluded from the regime.

Westpac said large multinational foreign banks should be included in the levy "so as to avoid Australian banks being at a competitive disadvantage in the Australian market to globally active foreign banks". CBA and ANZ also want the levy applied to foreign banks.

Sunset clause

Even though the Treasurer Scott Morrison said on Sunday the levy would be permanent, banks want a "sunset clause" introduced.

"Given the stated purpose of the levy is for budget repair, the legislation should include a clause that the levy ceases once the budget moves to surplus," said Westpac. It also wants the government to be able to suspend the levy should payment of it place undue stress on a bank.

CBA said it was not appropriate for the levy "to become an on-going tool for governments to fill budget gaps at the expense of the banking industry, or indeed other industries in the future, and through them ordinary Australian taxpayers". Mr Morrison said on Sunday the government had not plans to increase the tax, which ANZ said "is very important in terms of investor confidence in Australia."

NAB was critical that the levy is a "tax on a tax" given it currently applies to current tax liabilities, deferred tax liabilities and provisions for GST. Introducing double taxation ran counter to guidance from the International Monetary Fund, it said. ANZ also said the new tax should "incorporate a principle of avoiding double-taxation".

NAB also called for a 'regulatory impact statement' to be created and argued the absence of one is "inconsistent with the government's ongoing approach to regulatory reform, which focuses on reducing the regulatory burden on businesses and the broader economy."

CBA and Westpac want the levy to exclude liabilities in foreign branches. CBA said a levy on these will compromise its ability to fund businesses doing business abroad.

ANZ said comments from the government that the tax is being levied as a charge for the implicit guarantee of support in a crisis should force a reconsideration of the need for a regime for loss-absorbing capital in Australia.

With Treasury confirming last week that derivative positions will be included, Westpac, ANZ and NAB said this should apply to netted positions, with NAB warning applying a simple accounting liability method "will have a material impact on Australian financial markets". CBA said derivative liabilities should be excluded.

Risk of unintended consequences

CBA called for a delay of the introduction of the legislation "to closer to 30 September 2017, in order to have some time to prepare for implementation and reporting". None of reporting forms used for existing APRA or the ATO capture the liabilities that will be subject to the tax, CBA noted.

Mr Narev also used the Treasury submission to set out the bank's concerns about the tax more broadly, saying "political risk is viewed as a significant risk in Australia, and business leaders and commentators beyond banking have expressed concern about contagion to other industries."

"Lack of investor confidence will affect our ability to compete for funding and capital unless the subsequent design and implementation of the levy is fair and predictable," he said.

"We remain very concerned at the speed with which the levy is being introduced, and the significant risk of unintended consequences that could impact the stability and effectiveness of the banking system."

Macquarie is not making its Treasury submission public.

Each of the big four banks criticised the tight implementation timetable in their individual submissions. Draft legislation is due to be released on Wednesday. The banks will get 24 hours to provide their feedback on the bill by Thursday, the same day it is finalised, before it is introduced into parliament by the end of the month.

Australian Bankers' Association chief executive Anna Bligh reiterated calls on Monday for the banks, their regulators and Treasury to be given more time to respond to the measures.

The ABA, which has also called for a regulatory impact statement, said the banks should be given at least four weeks to respond to further Treasury analysis on the impact of the tax, the draft legislation and its explanatory memorandum.

The ABA also wants Treasury to release modelling on the economic impacts of the bank levy by Tuesday evening to assist the banks with their feedback on the draft bill.

"The government has failed to meet its own criteria around transparency and accountability in decisions, evidence-based policy development, and effective administration of regulation," Ms Bligh said.

"A longer consultation period, including engagement between banks and all affected regulators, will help to avoid unintended consequences on the economy and financial system."

 

 

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