30 May 2017
Speech - #2017012, 2017

Major Bank Levy Bill 2017, Second Reading speech, Parliament House, Canberra

Check against delivery

The Turnbull Government is committed to Australia having a world leading financial sector.

Our banks must be unquestionably strong, but they must also be unquestionably accountable, unquestionably fair and our banking system must be unquestionably competitive.

The Government is also committed to ensuring that Australia’s largest banks are held to account and make a fair additional contribution to the Australian community which they serve.

Australia’s financial system is strong, stable and well-regulated and has weathered global volatility well.

Nevertheless, the banking system in Australia – with a small number of large and highly profitable banks at its core – is highly concentrated.

The Government and the Australian Prudential Regulation Authority (APRA) have taken, and continue to take, steps that will force banks to take greater responsibility for their own resilience and avoid the need for taxpayer-funded bailouts.

The major bank levy will build on these critical prudential reforms by making stable and secure funding sources relatively less expensive.

Importantly, it will also support competition in the financial system by providing a more level playing field for smaller banks and other providers of financial services who compete with the larger banks who enjoy cheaper costs of funding.

Australia’s five largest banks are highly profitable – earning more than $30 billion a year after tax – and benefit from a regulatory system that has helped to embed their dominant position in the market. For example, the major banks are accredited to use internal ratings-based models that allow them to reduce the amount of capital that they must hold, lowering their funding costs relative to the smaller banks who rely on standardised risk weights.

They also contribute to systemic risk through their scale and concentration to the financial system – risks that ultimately fall on the broader Australian community.

Hence, from 1 July 2017 all Authorised Deposit-taking Institutions (ADIs), foreign and domestically-owned, with greater than $100 billion in licensed entity liabilities will be liable to pay the major bank levy, which will include the Big Four banks.

Unlike the previous bank deposits tax measure, which was abolished by this Government, smaller banks will not be liable to pay the major bank levy. The threshold will be indexed to growth in nominal Gross Domestic Product.

The major bank levy will equal 0.015 per cent of each affected bank’s licensed entity liabilities each quarter (0.06 per cent per annum), excluding Additional Tier 1 capital, deposits protected by the Financial Claims Scheme (FCS) and the quarterly average value of Exchange Settlement Account (ESA) balances held with the Reserve Bank of Australia (RBA).

Unlike previous proposals considered by earlier Governments, this levy will not apply to everyday household deposits. Nor will it apply to banks’ assets – such as mortgages. It will also not apply to other financial institutions, such as insurance companies or superannuation funds.

It is not a levy on depositors or savers or mortgage holders.

Liabilities captured by the levy include, for example corporate bonds; commercial paper; certificates of deposit; Tier 2 capital instruments; operational liabilities and non-FCS protected deposits.

Treasury estimates that the levy is expected to raise around $1.5 billion a year. This represents a fair contribution by the banking sector to the Australian community and contributes to a long term balanced Budget.

To minimise additional red tape costs, assessment of the levy will largely rely on data already reported to APRA and will be payable quarterly to the Australian Taxation Office.

The Government is working with the banks to ensure a smooth transition to the new regime. To assist major banks to begin to comply with the levy, the first levy calculation and instalment will be delayed by three months – at no cost to revenue – to provide additional time for banks to make necessary systems changes.

The levy will be administered by the ATO, with APRA’s role being solely to assist with data collection.

The levy will support efforts to improve financial system resilience.

The Turnbull Government and APRA are working diligently – in line with the recommendations of the Murray Financial System Inquiry – to improve the resilience of Australia’s financial system. This includes:

setting bank capital requirements such that Australian banks are ‘unquestionably strong’;

strengthening APRA’s crisis management powers;

improving bank liquidity and encouraging more stable funding; and

ensuring that our banks have appropriate loss-absorbing capacity.

The major bank levy will complement these important reforms.

By excluding Additional Tier 1 Capital and FCS-protected deposits from the levy base, the levy will work in tandem with APRA reforms.

The effective exclusion of liabilities used to fund ESA balances held with the RBA will also ensure that the levy does not impinge on the operation of Australia’s payments system.

The levy is also designed to support competition.

The House of Representatives Economics Committee’s ‘Review of the Four Major Banks’, commissioned by the Government last year, concluded that Australia’s banking sector is an oligopoly and that Australia’s largest banks have significant pricing power which they have used to the detriment of everyday Australians.

This is not a situation that the Government is willing to accept.

In the 2017-18 Budget we announced a range of measures to improve competition in the financial system, including:

  • a reduction in regulatory barriers for new and innovative entrants in banking;
  • an enhanced regulatory sandbox, to support innovation;
  • an extension of the Crowd Sourced Equity Framework, to help get new businesses off the ground; and
  • a commitment to Open Banking, to empower consumers to have control over their data and get the best possible deal.

We have also established a Productivity Commission inquiry into the state of financial system competition, to be supplemented by regular in-depth inquiries into specific financial system competition issues by the Australian Competition and Consumer Commission.

These measures will support economic growth and deliver better outcomes for consumers and small businesses. The major bank levy builds on these reforms.

The levy will help create a more level playing field for smaller banks and non-bank competitors. This will give existing and new players – including FinTechs – a better chance to grow their businesses and deliver improved services and experiences to all Australians.

The major bank levy does not give any bank an excuse to increase costs for their customers.

That is why the Government has directed the ACCC to undertake an inquiry into residential mortgage pricing. The ACCC will be able to use its information-gathering powers to obtain and scrutinise documents from any bank affected by the levy and to report publicly on its findings.

Following the introduction of the levy, it is my expectation that, in setting their prices, banks will effectively balance the needs of borrowers, savers, shareholders and the wider community.

The ACCC inquiry will illuminate how the banks respond to the introduction of the levy and give all Australians the information they need to get a better deal elsewhere from any of the more than 100 other banks, credit unions and building societies, as well as other non-bank competitors.

The Turnbull Government has been a world leader in making sure that big companies pay their fair share of tax.

To close, this Bill delivers on the Government’s promise to ensure that Australia’s largest banks are held accountable to the Australian community.

It is evidence of our Government’s utmost commitment to long term budget sustainability and to ensuring that Australia’s largest banks make a fair contribution to the community.

It builds on our program of prudential reforms, contributing to the resilience of our financial system and helping to ensure that banks can stand on their own two feet without recourse to taxpayers at times of financial stress.

Finally, it enhances competition – supporting economic growth and delivering better outcomes for Australian consumers and businesses.

Full details of the measure are contained in the Explanatory Memorandum.