The big four banks just can’t take a trick when it comes to their scare campaign about the levy revealed in the 2017-18 Federal Budget in May. The banks and the Bankers Association and some in the media tried sovereign risk, threat to stability, threat to shareholders/superannuation funds/small investors, home borrowers, interest rates and and the availability of loans.
Investors large and small took fright at the levy and one from South Australia and sold – the bank’s shares lost around 7% from the budget to last week. Yesterday’s announcement from APRA about new bank capital buffers played a part in that nervousness as well, but the eventual announcement proved that panic to be misplaced.
Now the levy claims from the banks and others (and some fund managers and analysts) has been shown to be wrong.
In late May before Senate estimates in Canberra, APRA head, Wayne Byers shot down most of that alarmist nonsense saying it would not affect the banking system’s resilience or harm banks’ ability to hold sufficient capital. Mr Byres said they would still be “quite profitable" even after paying the levy.
“”We expressed our view that this did not jeopardise our prudential objectives, and was not going to have a material impact on the resilience of the banking system,” Mr Byres said.” (http://www.smh.com.au/business/banking-and-finance/apra-says-bank-levy-wont-have-material-impact–on-stability-20170530-gwg4cb.html)There’s a range of things that banks can do to respond to that levy, they will make their commercial decisions."
And on Tuesday there was confirmation that the costs of the levy are already being offset. In the minutes of the Reserve Bank’s July 4 board meeting (http://www.rba.gov.au/monetary-policy/rba-board-minutes/2017/2017-07-04.html) was this paragraph:
"Members discussed trends in the composition and cost of Australian banks’ funding. Deposits, which are generally a relatively low-cost form of funding, had increased as a share of funding over recent years, to around 60 per cent, while the share of debt funding, particularly at short maturities, had declined.
"The cost of both types of funding had declined further since late 2016.
"Members noted that, over the same period, banks’ lending rates had increased slightly, driven by increases in housing lending rates for investors and on interest-only loans. As a result, the implied spread between the estimated average outstanding lending and funding rates for banks was estimated to have increased slightly.”
The spread refers to the gross interest margin according to the RBA it has widened. There are only 6 cents of costs associated with the levy – 2 cents can come from a wider spread, 2 cents from lower costs and 2 cents from higher fees (on top of the regulator mandated increase in investor own mortgage rates). In fact all 6 cents could come fro the gradually widening spread.
Later today APRA will tell the big banks the new rules to make them “unquestionably strong”. This will mean extra capital, raised from shareholders, which will make the big four even better risks to lend to, meaning their borrowing costs will fall further over time, widening their gross interest margin.
The banks are already backstopped (The big four an at least 8 other financial groups) via the Reserve Bank’s Committed Liquidity Facility which will provide close to $200 billion in support in the event of a drying up of access to financial markets in a crisis. The banks are paying a commitment fee of 0.15%, which they are ‘grudgingly’ paying.
