Will the bank levy actually lower bank profits? Maybe not.

In the comments section of my earlier post about hatred of the banks, John Walker (no relation) asked:

If the big four did pass on the tax to their customers, do you think the ‘non big four’ banks, building societies etc would grab the chance to be more competitive or grab the chance to raise their charges?

Terrific question. I don’t know for sure, but history suggests the answer is that the smaller banks would mostly grab the chance to raise their charges. That’s the argument in my latest column for the CEO Magazine. (Note that some bank analysts seem to think around half of the levy will end up impacting on shareholders as smaller profits.)

We shouldn’t necessarily conclude that higher profits for the smaller banks is a bad outcome, though. There’s more than one road to competitiveness with larger rivals.

In this case, the smaller banks have been underpricing the bigger banks for year to no great effect. For instance, ME Bank, formerly Members Equity, was for many years consistently the lowest-price lender of any substantial size in the Australian marketplace.

How much good has that done them? Well, some, but not that much. ME bank is growing, but it’s no giant yet. And for their money, its industry super fund owners get about half the return on equity they get from shares in the Big Four banks.

To grow, ME Bank and others like it need new capital – and to justify new capital, they need better returns.

None of this is certain, but allowing the smaller players to earn a little more may be an important step in helping them compete effectively with the Big Four.

Go on, read the column.

Footnote: The front page of today’s Australian Financial Review has former CBA CEO David Murray slamming the bank levy as a “hate tax”. He’s right, in the sense that the tax is only being imposed because a majority of people dislike the banks. That doesn’t mean it’s not merited.

David on Twitter: @shorewalker1

About David Walker

David Walker runs publishing consultancy Shorewalker DMS (shorewalker.net) and is commissioning editor of Acuity magazine. David has previously edited the award-winning INTHEBLACK business magazine, been chief operating officer of online publisher WorkDay Media, held policy and communications roles at the Committee for Economic Development of Australia and the Business Council of Australia, and run the website for online finance start-up eChoice. He has written professionally on economics, business and public policy since 1987 and spent three years in the Canberra Press Gallery for News Limited and The Age.
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One Response to Will the bank levy actually lower bank profits? Maybe not.

  1. Nicholas Gruen says:

    A hate tax ey? Doesn’t sound all bad to me.

    Cigarette, gambling, carbon emissions, tax avoidance, the undeserved income that comes from lobbying the government to get your land rezoned, the overweening pride and sense of entitlement that (sometimes) comes with excessive wealth.

    I hate those things ;)

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