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BFCSA: Some estimates value the government support for Australia's major banks at more than $11 billion.

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Billions in hidden subsidies going to too-big-to-fail banks

Updated Wed 2 Apr 2014, 10:46am AEDT

As the first round of submissions to the Federal Government's Financial Systems Inquiry closed this week there was a timely reminder that the fundamental cause of the global financial crisis is still deeply embedded in the banking system.

The world's wealthiest and most powerful banks still operate behind the shield of being "too-big-to-fail" (TBTF), an issue that former US Federal Reserve chairman Ben Bernanke fingered as a major factor in the meltdown and the ensuing economic calamity that still haunts markets and economies worldwide...."


Big Four estimated to reap billions

Unfortunately Australia's big banks did not make the cut for the IMF study, and little work has been done on just what it costs the taxpayer here.

In December, the banks' regulator, APRA, said that while no Australian bank was currently on the global too-big-to-fail list (also known as the Global Systematically Important Banks, or G-SIBs for short), the Big Four should now be included.

Given that CBA, Westpac, NAB and ANZ have assets that when added together are equivalent to one and half times Australia's GDP, it is a reasonable call to say they are systematically important.

A private research outfit, Morgij Analytics, recently dug a bit deeper and commissioned a paper looking at the hidden costs of the implicit government guarantees in the Australian financial system.

It came up with a rather jaw dropping figure of $11.1 billion as the aggregate tax payer funded subsidy in Australia.

That includes a funding advantage of $2.5 billion for the TBTF implicit government guarantee and $4.5 billion for underpricing the fee associated with the Committed Liquidity Facility.

It is difficult to assess just how exact the costs are, but the research does highlight widely held belief that the big banks enjoy government largesse well beyond that afforded to their smaller competitors.

It is an argument hotly disputed by the Big Four. The CBA in its submission to the Financial System Inquiry argues that there is "not an implicit guarantee for the major banks", rather there is "general support for the whole banking system".

The smaller regional players are not so sure and say the Federal Government should declare whether it would allow some lenders to perish in the event of another financial crisis.

That is not to say that completely removing government support is a likely, or even appropriate, outcome.

However, the IMF argues increasing banks' capital requirements and recouping taxpayers' costs through a financial stability tax are the reforms policy makers should be pursuing.

They are exactly the sort of policies the big Australian banks will be arguing strenuously against in the inquiry.

The issue of banks being too-big-to-fail and the moral hazard that entails did not quite make the FSI's terms of reference despite the unhealthy appetite for risky lending it seems to inspire, and the central role it played in the GFC.

Maybe it is one for the next banking inquiry which, at the current rate, should be due around 2030.

First posted Wed 2 Apr 2014, 10:45am AEDT

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  • doyla66
    doyla66 Wednesday, 02 April 2014

    So does this mean they might not have enough money in the kitty to cover bank deposit guarantees and yet another load of b### has been spun on us re how bank deposits are guaranteed as per that big black seal on the ASIC announcement on the subject??

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