Major Bank Levy Bill 2017

1.1        Labor Senators support this bill. This state of the budget and the need for this measure in relation to budget repair means that Labor will not stand in the Government's way.

1.2        Thanks to this Government's budgetary mismanagement, gross debt smashed through the half a trillion mark last week – for the first time in the nation's history.  With debt and the deficit blowing out under this Government's watch, it would be irresponsible of Labor to have an alternative position.

1.3        While Labor Senators support the bill, it is not a blank cheque. Labor Senators will not be excusing the incompetence of the Treasurer or the Government.

1.4        Labor Senators support the recommendations set out in the main body of this report. However, the need for their inclusion demonstrates how the Treasurer has botched the policy process.

1.5        Labor Senators have used the Senate inquiry, brief as it is, to expose this incompetence. Several points will be briefly mentioned:

• the leak on budget day;
• the impact on consumers;
• the revenue black hole;
• potential responses by Macquarie Bank;
• lack of policy clarity;
• lacklustre ACCC powers; and
• foreign banks. 

1.6        It is a very serious matter that this policy measure was leaked ahead of budget night. Labor Senators believe the Treasury Secretary when he says that only a small number of people knew about the measure. Labor Senators believe it is important that ASIC gets to the bottom of what happened.

The impact on consumers

1.7        The Regulatory Impact Statement released with the legislation stated what the Treasurer could not––that consumers, non-equity funding sources, shareholders and employees could bear the brunt of this levy.

1.8        This was further underlined in the testimonies given by the banks at the hearing, where they all said that the bank tax won't simply be 'absorbed'.

1.9        Treasury further underscored this point through their answers to questions on notice that were put to them prior to the hearing.  The costing, Treasury says, takes into account 'some pass-through of the levy to customers, as evidenced by previous behaviour by the banks'.

1.10      It took Treasury officials to admit something that the Treasurer could not bring himself to do.  The numbers in the budget assume that the bank levy will be passed on to consumers.

1.11      Labor Senators are disappointed that the Government has chosen to hide this information from the public. Even at this late stage, the calculations and assumptions underlying the revenue costing still have not been made available.

The revenue black hole

1.12      The total figures that each bank is expecting to pay as a result of the bank levy is now known. The banks are required by law under the Corporations Act and ASX Guidelines to inform shareholders about the impact of the bank levy.

1.13      These figures total $1.45 billion pre-tax, and $1.015 billion post-tax––a shortfall when compared to the budget's expectation of $1.6 billion, or any other bank levy figure you find in the budget papers.

1.14      Treasury explained that the reasons for the shortfall might be due to credit growth figures and interactions with other taxes.

1.15      Regarding credit growth, the assumption of 5.9 per cent liability growth year on year seems high when banks such as Westpac have indicated that their estimates are in the order of 4 to 5 per cent.

1.16      The interactions with other taxes are complicated, but Treasury's response seems to imply that dividend cuts could be a reasonable response for a bank to take (impacting franking credits available).

1.17      It remains to be seen as to whether this will all play out in reality. However, the disclosures and statements from the banks do not bode well at all for the actual bank levy revenue raised.

1.18      Given that the operation of certain provisions allowing for the liability base for the bank levy to be adjusted by the Treasurer by legislative instrument only work to decrease the base, Labor Senators would like the Treasurer to explain what actions he will take to make up the shortfall in expected revenue.

Potential responses by Macquarie Bank

1.19      Labor Senators asked direct questions to Macquarie Bank about media reports that Macquarie Bank was considering leaving Australia. Macquarie Bank responded by saying that no final decisions had been reached yet and that this matter was under regular review.

1.20      Labor Senators also note comments from the Shadow Treasurer who said that that:

The bank levy liability base was clearly designed to ensure Macquarie Bank was captured by the tax so Scott Morrison owns any decision by them to move operations, or to be domiciled overseas.  This is quickly moving from just a terrible mishandling of the process surrounding the bank tax, to more concerns about the government's inability to manage the economy.

1.21      Labor Senators are concerned not only by the Treasurer's handling of this policy but also his ability to manage the economy. It is very concerning that foreseeable consequences of the levy were not thought through.

Lack of policy clarity

1.22      Several reasons have been given to justify this levy. Foremost is budget repair, while competition, complementing prudential reforms and the major banks contribution to systemic risk are also offered.

1.23      Labor Senators found out through the hearing that:

• competition effects are likely to be small;
• the levy does not complement prudential reforms, and, if anything, is slightly detrimental to reforms like Total Loss Absorbing Capital; and
• Treasury officials acknowledged that the levy, in part, is in response to the systemic risk of the major banks that, in the Treasurer's words 'ultimately fall on the broader Australian community'.

1.24      Labor Senators are supportive of this bill in that it contributes to budget repair. Labor Senators remain concerned that the bill has only fuelled confusion when it comes to these other policy areas.

1.25      Recommendations 1 and 3, which recommend a review of the legislation and seek an explanation for the inclusion of Macquarie Bank in the levy but the exclusion of large foreign banks are an acknowledgment by Government Senators that they too are also confused as to the policy objectives of this bill.

1.26      Recommendation 4, which seeks to give APRA powers to suspend the levy in times of financial or economic distress, is an additional concession by Government Senators that the bill does not 'complement' prudential objectives as claimed by the Treasurer.

Lacklustre ACCC powers

1.27      Labor Senators also heard that the ACCC's powers to take action will be limited to scrutiny of owner-occupied and investor mortgages and not other banking products.

1.28      Furthermore, the scope is limited to any cost impacts that occur before June 2018.

1.29      Labor Senators are concerned that the Government has not appropriately equipped the ACCC to discover and take action on cost pass-through. It is likely that the design of this measure will do little to prevent banks from passing on the majority of this levy on to consumers.

1.30      This finding, along with the secrecy behind the revenue costings, could imply that this was the Government’s intention all along.

Foreign banks

1.31      Labor Senators also heard evidence from the major banks who argued that the levy should be extended to cover large foreign banks to maintain competitive neutrality in finance markets.

1.32      Major banks argued that foreign banks are strong competitors in low margin international markets such as institutional banking, trade credit and custodian services. Major banks affected by the levy could stand to lose business to foreign banks, with bank levy revenue being lost as a result.

1.33      Labor Senators also note the comments given by Treasury officials at the hearing, stating that they had considered these issues when designing the policy. However, Labor Senators believe that the Government should release this work and clearly explain why large foreign banks should be excluded from the measure. Labor Senators support Recommendation 3 and its intention to address this issue.

1.34      Labor Senators once again have shown their willingness to contribute to budget repair.

1.35      When it comes to the Government's claims of improving competition and delivering cultural change in the banking and financial services sector, Labor Senators believe that only a Royal Commission will deliver the systematic, structural and cultural change required.

Senator Chris Ketter                                 Senator Jenny McAllister
Deputy Chair                                               Senator for New South Wales

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