Federal government pursues levy on bank deposits

Last week the Australian Financial Review reported that “the government’s economic statement...will contain a deposit insurance levy... to underwrite any Australian bank should it need assistance in the future”. The latest report states that the deposit protection levy will be equal to 0.05% of insured bank deposits. The levy is expected to come into force in January 2016 and will be used to fund any future bailouts. The need for the proposed levy was supported by the International Monetary Fund that highlighted a gap in Australia’s public policy in regards to “provisioning for any potential bank or deposit-taking institution failure” and concluded that Australia “should develop a financial stability levy as a matter of high priority”.

The aim of the proposed levy is to raise A$408m in the first six months and A$325m in the following 12 months. According to JP Morgan, the prospect of a tax on Australian bank deposits would pose downside risks to the major banks’ earnings. This however is only likely to have a minimal earnings impact with banks expected to offset the costs via lower rates on deposits, higher rates on loans and higher fees. The Australian Bankers Association confirmed that banks are expected to pass this levy on to customers with savings in terms of lower interest rates on their deposits or to borrowers.  

JP Morgan commented that if a levy were material, it could have negative unintended consequences on the bank’s funding mix and credit ratings and also perhaps broader competitive issues regarding smaller banks.