Implicit subsidy not as obvious as it seems

By Tony Pearson, Chief Economist and Executive Director – Industry Policy, Australian Bankers' Association

6 June, 2016: There has been some discussion recently around whether Australia’s major banks receive a financial advantage from implicit government support.

This stems from a perception that the major banks would receive government backing if they experienced major financial difficulty. The idea is that investors see banks as less risky because of this government support and therefore the major banks can raise funds at a lower cost.

Last month a study by a Reserve Bank of Australia analyst was released under Freedom of Information laws. It attempted to estimate if an implicit subsidy for Australia’s major banks does, in fact, exist. The study, published in May 2015, found that there was a subsidy provided during the global financial crisis, but that the value of the implicit subsidy has since declined and, “on some measures is no longer significant”.

Media reports of this subsidy being worth between $1.9 billion and $3.7 billion to the major banks reflected an average over a number of years, including the GFC. There was less emphasis on the observation that currently the subsidy may now be insignificant.

The Greens have proposed a new tax on the major banks to pay for the implicit subsidy. Interestingly, their policy proposal refers to a media article on the topic rather than the RBA study itself, which leaves me wondering if the Greens’ have read the RBA study.

The Greens’ proposal to impose a 20 basis points levy on bank assets in excess of $100 billion is simply another tax on banks that would hurt depositors, mortgage holders or bank shareholders, including retirees.

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