The Obvious and Not-So-Obvious Problems with Hockey’s Bank Deposit Tax

by Dr. Andrew D. Schmulow

The Conversation, (2015), published electronically.

The federal government has given itself until the end of the year to respond to the many recommendations contained within last year’s Financial System Inquiry report, but in one area it has already decided to act against the Chair David Murray’s advice.

From January 1, 2016 the government will levy a bank deposit tax. In all likelihood this will be 0.05% of deposits up to $250,000. The scheme would be limited to the big four (ANZ, NAB, CBA and Westpac). The thinking is that the big four are big enough to absorb the tax, without passing it onto depositors. The small banks, credit unions and friendly societies would be exempt.

Under the proposal, if a bank fails and needs a bail-out, the money generated by the tax (one estimate puts it at A$500 million annually) would foot the bill. Whether that’s correct is debatable. A modest A$10 billion bailout would require the scheme to run for twenty years.

Murray says this “ex ante”, or upfront arrangement, is the incorrect approach. He argues the levy should be “ex post” – in other words, the scheme should seek to collect the funds after a bank becomes insolvent, from all of the banks that remain. This, he argues, would only be necessary in the event that the government was not able to recoup its costs through the liquidation of the failed bank’s assets. Pretty unfair to those banks that were well run, and, in effect, a free pass to the ones that fail.

This article first appeared in The Conversation. Also published at Michael Yardney’s and The Australian.