Big bank budget battle
![Tony Boyd](/web/20170513235017im_/http://www.afr.com/content/dam/images/1/3/s/y/3/g/image.imgtype.afrAuthorAvatar.120x120.png/1425275986441.png)
The mood was civil and professional but Thursday's meeting between bankers and Treasury officials to discuss the new $6.2 billion bank tax will go down in history as an embarrassing debacle.
Treasury made it clear to the banks ahead of the meeting that it was not called as part of a consultation process. Everyone going into the meeting knew that Treasurer Scott Morrison's tax would go ahead no matter what. It became obvious during the meeting that if the banks succeeded in convincing the government to carve out or exempt certain liabilities from the tax, then the rate of the levy would increase.
For example, if the base of liabilities covered by the tax is narrowed in order to preserve financial stability, then the levy would be lifted from the proposed level of six basis points. This is classic policy on the run.
The embarrassing thing for the government is that it is playing around with the efficient functioning of the financial system. Overseas debt investors who fund the banks must be confused given Australia's financial system performed so well throughout the financial crisis.
![Bankers met Treasury officials in Sydney on Thursday to discuss the new levy.](/content/dam/images/g/w/2/x/y/r/image.imgtype.afrArticleInline.620x0.png/1494578804547.jpg)
The meeting in the Treasury head office in Sydney was not an opportunity for the chief financial officers from ANZ Banking Group, Commonwealth Bank of Australia, National Australia Bank, Westpac Banking Corp and Macquarie to argue against the tax. It was an information sharing exercise involving the government explaining how the tax would work.
But a fundamental problem became apparent as soon as the meeting started. The Treasury officials did not know how the tax would work.
The two Treasury officials representing the government, Diane Brown and Lynn Kelly, were unable to answer most of the questions put to them. Over the two-hour meeting, the bankers asked about 25 to 30 questions.
Experts stumped
Brown, who is a chief adviser in the financial system division, and Kelly, who is a chief adviser in the taxation division, were stumped when it came to answering the questions put to them.
The presence of Kelly was taken as a sign that the Australian Taxation Office would be responsible for collecting the levy. The bankers were surprised and mildly shocked that the officials did not know which liabilities would be captured by the new tax.
The budget papers released on Tuesday said the bank levy, which is six basis points, would apply to the following liabilities: corporate bonds, commercial paper, certificates of deposit and Tier 2 capital instruments.
The levy would not apply to additional Tier 1 capital and deposits of individuals, businesses and other entities protected by the Financial Claims Scheme. The Financial Claims Scheme guarantees up to $250,000 deposited with one or more banks.
One banker asked the Treasury officials how the levy fitted with the priorities of the Australian Prudential Regulation Authority, which has forced banks to raise capital in order to be "unquestionably strong".
The thinking behind this question is that banks have followed APRA's direction and raised Tier 2 capital to build their capital buffers to cope with troubled times. Now they are being given an incentive by the government to reduce this capital buffer.
There is plenty of confusion over APRA's role in government's move to tax the banks. The general consensus in the industry is that APRA was not consulted.
ABA hits back
But APRA has been defending the tax. It has made it clear it will continue with its work towards imposing higher capital obligations on the banks.
The Australian Bankers Association under its new chief executive Anna Bligh showed on Thursday that it will be standing up for sound and rational policy when it provided its perspective on the Treasury meeting. "Bank representatives left today's meeting with more questions than answers, with more than 20 important issues that were unable to be addressed," she said in a press release.
"These include serious and complex issues such as: the basis on which Treasury calculated the $6.2 billion estimate, how the new tax would affect transactions between the five banks and the Reserve Bank, and how that might impact the broader economy, and which of the banks' commercial activities will be captured by the tax."
The banks were initially given until Friday to respond with submissions on the new tax, but that has been extended until noon Monday. The legislation is proceeding like a runaway train with the objective of being passed by the end of the month.
Normally, new bills have a regulatory impact statement, but not in this case.
Morrison successfully blindsided the banks with the biggest changes to the oversight of their operations in more than a decade and the most significant move against balance sheets since the Basel reforms were introduced. That is hardly good policy.