cobran20

SMH: Deposit levy talk weighs on bank stocks

42 posts in this topic

That's an interesting concept, that the bank passes on the levy to borrowers rather than depositors.

In reality they'll probably pass it onto both (in full for each!).

Absolutely, in the interests of fairness they have to screw both.

I'm eagerly awaiting all the spin and justification. The old "cost of funding" chestnut will have to be trotted out, but then there could be "administrative and systems overhead" dealing with the levy as well as "provisioning for future increases in the levy".

My main worry is that this gets people freshly used to the idea of a deposit levy and every time the budget situation deteriorates it can be upped (and naturally the banks will pass on the cost).

Edited by Turkey

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Absolutely, in the interests of fairness they have to screw both.

I can see a case for why depositors or borrowers should bare the levy.

Depositors are the ones whose funds are guaranteed if things go tits up, so they should pay it. They're the one's who benefit from the levy.

But borrowers are the ones that create the risk. They're the ones that will cause tits to Jesus. But if the bank goes bad they've got nothing to gain from a guarantee, why should they pay.

And, actually the banks are the ones that create the risk through their lending policies, so they should pay.

If the policy wasn't dreamt up by Kev on the back of a napkin on a flight from Canberra to Brisbane each bank would pay a different amount based on their risk.

I'm eagerly awaiting all the spin and justification. The old "cost of funding" chestnut will have to be trotted out, but then there could be "administrative and systems overhead" dealing with the levy as well as "provisioning for future increases in the levy".

You're right the banks will have to spend billions to upgrade their systems for this levy. Tor will make a fortune.

My main worry is that this gets people freshly used to the idea of a deposit levy and every time the budget situation deteriorates it can be upped (and naturally the banks will pass on the cost).

It's been more than a decade since Australians had to pay any sort of levy/duty/tax on banking. If Kev can pull it off, it will only be an election cycle till it gets increased or broadened. Once a levy off this type is normalised it will be broadened. Who would complain much about paying 0.25% on credit card transactions? Imagine how much revenue that would generate.

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hang on if banks loan us money, we pay insurance, if we loan banks money we pay insurance?

Of course, otherwise they would need to reduce their profit margin.

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They should have only imposed the levy on the big four. They are the main beneficiaries. That way if they tried to pass the levy on to their customers their customers could shift their savings to smaller banks/credit unions/building societies.

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hang on if banks loan us money, we pay insurance, if we loan banks money we pay insurance?

Banks don't loan money. They provide credit facilities. Big difference. Most people don't know the difference.

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$250k+ in an Australian bank? Beware the bail-in.

Last week the AFR reported the Rudd government was looking to introduce a deposit levy (tax):

The Rudd government plans to impose an insurance levy on all bank deposits, risking a major fight with one of the best-resourced industries on the eve of the election campaign.

Senior banking figures indicated on Thursday night they would oppose the move and depict it as a tax on bank depositors.

The government plans to impose a 0.05 per cent insurance levy on every deposit of up to $250,000 to protect depositors against collapses.

The banks said they will pass on the impost, which equates to 5¢ for each $100, to customers through reduced interest payments on deposits.

The banks are up in arms over who will foot the bill and there has been a media storm over the tiny fraction of a % that this insurance will cost (for example a bank would need only lower the interest rate paid on a deposit from 3.50% to 3.45% in order to recoup the cost). While the media, banks and politicians get into a scuffle over who will fund the minuscule cost of insuring funds under $250k, there seems to be no investigation or reporting by the media on what might happen to funds over the 'guarantee' limit in the case of a bank failure...

Eric Sprott said the following in a recently released interview:

“The one event in my mind would be when it becomes apparent to everyone that having a deposit in a bank is a very risky situation. We saw that in Cyprus where the depositors got nailed on the bail-in. We’ve seen all these proposals to have bail-ins as the solution to the problem in the US, in Canada, in Britain, in New Zealand and in Europe. All the paperwork has been laid out.”

While Sprott doesn't explicitly list Australia, keen eyed blogger 'Barnaby Is Right' captured these interesting snippets from papers that are flying about between our banks, regulators and the treasury, suggesting not only are Australian banks prepared to bail-in customer funds to get out of trouble, but will do so without any warning or disclosure to the market before such an event:

In a November 2012 Technical Note on the Financial Sector Program Update for Australia, as part of their Financial Safety Net and Crisis Management Framework, the IMF has advised that there is a problem:

[Past simulation exercises revealed the need for legislative changes to prevent premature disclosure of sensitive information. Australia’s securities disclosure regime requires, for the protection of investors, immediate and continuous disclosure of information that could reasonably be expected to have a material effect on the price or value of an ADI’s securities. There is a high probability that any resolution or crisis response measures will impact the price or value of an authorized deposit-taking institution’s (ADI’s) securities.

Poor coordination of compliance with the disclosure requirements, timing of resolution or crisis response actions, and the overall public communication strategy regarding these actions could pose risks to financial stability (e.g., through depositor runs) or thwart resolution actions (e.g., through the stripping of the ADI’s assets by insiders) or cause market disruptions. Legislative changes that reduce tension between investor protection and financial stability should be pursued.]

“Reduce tension” between investor protection and financial stability?!

By making laws to “prevent premature disclosure of sensitive information”?!?!

In order to prevent bank runs, which would happen if investors were to find out that a Cyprus-style “resolution or crisis response measure” is in the offing for the bank that they have their money in?!?!!!!

It's unlikely that an event requiring a bail-in would take effect in the near future without further warning signs, but the high level of exposure that Australian banks have to residential mortgages (as recently reported by Moody's) should be sounding alarm bells for those who have deposits at risk...

Australian+Banks+Residential+Loan+Exposure.png

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Does anyone know what happened in Cyprus with regard to taxes? Like if you owed the Government some tax and the banks got closed by the Government then did they still chase you for the taxes? I am assuming they did given the nature of Governments in general but it is an interesting scenario.

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The rumour is that a rate cut will be passed on in full with depositors paying the levy via reduced interest rates.

I wonder where offset accounts feature in all of this. Why aren't savers whinging about borrowers' tax free savings accounts that are not subject to the levy?

Will offsets be guaranteed (just asking in case somebody knows ... too lazy to check!)?

And what happens to offset accounts when water flows uphill, electrons attract each other and Australia has a full-on financial crisis with Cyprus style deposit theft?

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I wonder where offset accounts feature in all of this. Why aren't savers whinging about borrowers' tax free savings accounts that are not subject to the levy?

Will offsets be guaranteed (just asking in case somebody knows ... too lazy to check!)?

And what happens to offset accounts when water flows uphill, electrons attract each other and Australia has a full-on financial crisis with Cyprus style deposit theft?

That's a very interesting question and I'm sure Krudd hasn't worked out the answer yet. I haven't seen anywhere whether offset accounts will be taxed.

Offset accounts are far less separate than we are led to believe. About a year ago I missed a mortgage payment due to changing my banking arrangements. Within a short time I got a letter from my bank stating that under my loan agreement (volume 3, chapter 6, paragraph 7, page 1052) that the loan payment had been taken out my offset.

Loan agreements, technically (although almost never enforced), are far harsher than rental agreements in many respects. I read the agreement cover to cover - one point that stood out was that if I didn't cut the grass and the bank notified me that I needed to cut the grass and I didn't within X period they could foreclose. Under the agreement I had to notify/seek permission to do almost everything.

I've assumed the levy is PA, but it's not been explicitly stated anywhere I've read. Perhaps it's a one off, or a PW - once again I'm sure Kev didn't think about it.

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I haven't seen anywhere whether offset accounts will be taxed.

You can only have an offset with a variable rate mortgage right? I found out during my tax fun and games that I can easily pull money back from the mortgage into the offset and never got charged for it so since then I have kept my offset pretty low and pre paid the mortgage with what would have been in the offset. I figure that if things get super weird then they are less likely to grab pre paid cash from the mortgage than from an offset account (am with St George, don't know what happens with other accounts).

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I figure that if things get super weird then they are less likely to grab pre paid cash from the mortgage than from an offset account (am with St George, don't know what happens with other accounts).

This is why it would be nice to have some clarity. If an offset is safe then it's obviously a nice buffer to live off if things get funky. If not then your approach is the right one.

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You can only have an offset with a variable rate mortgage right? I found out during my tax fun and games that I can easily pull money back from the mortgage into the offset and never got charged for it so since then I have kept my offset pretty low and pre paid the mortgage with what would have been in the offset. I figure that if things get super weird then they are less likely to grab pre paid cash from the mortgage than from an offset account (am with St George, don't know what happens with other accounts).

There's the risk that you may not be able to yank it back off your mortgage. But I like your thinking

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There's the risk that you may not be able to yank it back off your mortgage. But I like your thinking

Yeah but at least it would stay where I want it (reducing my debt) rather than being told all my offset cash was turned into shares of Westpac.

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Yeah but at least it would stay where I want it (reducing my debt) rather than being told all my offset cash was turned into shares of Westpac.

Yup - as I said, I really like your thinking and I'll be adopting it myself if mine works the same way thumbsup.gif

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Because the money is not quarantined there is no reason to ever reduce taxes sensibly. Tax reductions become a political play thing: "Lets keep the medicare levy but give people more in childcare because that will win votes".

Agree.

Which also makes the whole taxation thing more complex, people bitch about paying taxes _and_ bitch about the lack of infrastructure investment. There is no clear correlation between the two. If taxes were at least faintly obvious to their purpose it would at least mean people would bitch in more interesting ways: "I pay $X in old people health tax and my gransma can't get a hip replacement" - much more interesting than just bitching "I pay too much tax".

Hmmmm. I can see how that might lift the national debate when it comes to taxes. I'm not convinced on the "leads to better money management" idea, but improved national discussion does have value.

You may have convinced me - I'll need to ruminate on this some more...... :wine:

Cheers,

Dead Money

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