Imagine if the government routinely chipped in half the cost of McDonalds’ and KFC’s bun orders. Other fast food restaurants had to buy their own buns. As you’d expect, the two chains would spread further, enjoy bigger relative profits than other restaurants who in turn would struggle to compete. 

Never gonna happen. Pic: Peter Nicholson

Such a policy would not survive public scrutiny. But banking works similarly in Australia, where taxpayer are each contributing up to $7 billion a year to the bottom lines of the big four banks – ANZ, Westpac, National Australia Bank and Commonwealth Bank.

The money doesn’t flow directly, but if the banks lose enough in a financial crisis taxpayers are on the hook to ensure their creditors get paid. No matter what governments might say, the GFC showed in the United States and Europe that they will come to the rescue when the financial system looks like choking.

In the meantime this implicit insurance for creditors means they are willing to lend to banks at lower interest rates than they otherwise would, a boon for big banks’ bottom lines. It is curious the government has devoted so much energy to introducing a new tax on resource firms when they don’t enjoy any implicit subsidy from taxpayers.

Standard and Poor’s business is to work out the likelihood creditors will get their money back. In December it said very clearly that were it not for Australian taxpayers standing behind the big four banks their credit ratings would drop two notches.

That would give them similar credit ratings to smaller banks like Suncorp or Bank of Queensland, which do not enjoy the implicit guarantee and pay about half a percentage point of interest more on their borrowings.

If we ignore deposits, which are insured explicitly up to a maximum $250,000, the big four banks have total wholesale liabilities of just over $900 billion. Reasonable people can argue about what fraction of those are affected but the annual benefit to banks is probably worth between $2 billion to $7 billion, which is about 30 per cent of their combined annual profits. 

Lo and behold the big banks’ interest margin – the gap between what they borrow at and what they lend to their customers at – is also roughly half a percentage point greater than that for regional and smaller Australian banks. You don’t need a PhD in economics to know that part of that gap is substantially owing to taxpayers’ free insurance.

Last week the Bank of England said the subsidy from British taxpayers to Britain’s biggest banks was at least 6 billion pounds a year. Governments overseas are attempting to deal with this unfair and damaging benefit. The Swiss and British governments, for example, are forcing their biggest domestic banks to hold more much capital, to reduce the likelihood their taxpayers will be called upon in a crisis.

The subsidy is not only unfair for taxpayers and smaller bank competitors, it also distorts the whole economy. Ordinary Australians are pushed out of the housing market as outsized pay packets in the teeming upper ranks of finance drag up prices. The subsidy encourages banks to grow even larger, dragging more of society’s best and brightest into financial services. The subsidy has also helped Australian households become among the most indebted in the world, as loans are more plentiful than they would otherwise be.

An alternative to forcing large banks to hold more capital would be a flat tax of half a percentage point, say, on banks’ non-deposit liabilities and the new revenue should be used to cut personal income tax rates for all taxpayers. But sadly governments can rarely be trusted to use new revenue to cut other taxes.

The GFC showed that genuine competition among banks is a farce; the possibility of failure, which underpins capitalism, has been removed.  How to rectify this problem is not clear though. It’s always possible further government meddling would make the problem worse. Nevertheless authorities here should at the very least work out how much the implicit guarantee is worth so taxpayers can better understand what is going on.

Follow Adam on Twitter: @adam_creighton

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36 comments

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    • Shane says:

      06:49am | 04/06/12

      OK, so let’s see if I’ve got this straight.

      You claim that taxpayers are contributing $7 billion per year to the banks, but that contribution is not any actual payment. Instead it’s because the government wouldn’t let them collapse, so the banks get better rates on credit, which lets them make good profits.

      Is that right? If so, your article here and in particular the second paragraph is a complete fantasy reminiscent of someone who spends their entire day with their face pressed against a bong.

      Do you think a non guaranteed (and logically therefore more fragile) banking system would be positive for Australia, for taxpayers or banking customers?

    • Tony of Poorakistan says:

      09:30am | 04/06/12

      What would be better is not to have a Big Four Banking Cartel, because that’s what we have. 
       
      Banks like Bendigo and Suncorp are never going to be in a position to provide real competition while they are forced to pay extra for their borrowings.

      We need a system where the small guys get the breaks, not those Collins St spivs who are merely crooks in suits.

      Why can’t the Government simply tax them a half-percent of their turnover to take back the advantage and provide a level playing field? So they make 3 Billion in profit, rather than 6 Billion.

    • Bill says:

      10:11am | 04/06/12

      Yeah Shane, what we should really be doing is giving the banks MORE of a leg-up, don’t you think?

    • Joe says:

      01:50pm | 04/06/12

      Shane, You need to ask yourself what is worse, Bankrupt Banks or a Bankrupt Country.  Compare Ireland, which backed it banks and now the taxpayer is taking the haircut, to Iceland, which let its banks fail and the shareholders, bondholders and depositors are taking the haircut, not the taxpayer.

      Sure bankrupt banks are very bad but a bankrupt country is much, much worse and that is what you are risking with governments guaranteeing bank debt.  The government should only guarantee small depositors up to say $100,000 and after that you should be big enough to look after your own money.  Bond holders must not be given a government guarantee, it is absurd.  These are people making free investment decisions which the government has little part in.  If a bank goes bust then there needs to be special laws put in place to allow the orderly wind down of that bank, which protects the economy as much as possible.

      Because Australia has such high levels of foreign debt, much of it owed by our big banks, the country is losing its ability to make sovereign decisions.  As the global economic conditions continue to deteriorate this will only get worse.

    • Grumpy says:

      02:48pm | 04/06/12

      “Because Australia has such high levels of foreign debt, much of it owed by our big banks, the country is losing its ability to make sovereign decisions.  As the global economic conditions continue to deteriorate this will only get worse.”

      Our foreign debt is extremely low. We could afford to borrow billions more and still be in a good position compared to every major economy in the world. The Australian Economy is booming and we have the best financial situation of any country in the world.

    • Shane says:

      06:26pm | 04/06/12

      Bill/Tony, it’s always possible to find some fault if you look hard enough and are prepared to suspend any kind of rational thought process. I’d much rather the banking system we have than that of Italy, Spain or Greece.

      Joe, Not sure where you’re getting your information. When the icelandic system collapsed, the government kicked in enough equity to equal roughly 30% of the nation’s GDP. During the crisis (in which the taxpayer was bailing out the banks),
      - Interest rates hit 15% (and that alone would drive many Aus families into losing their houses)
      - Unemployment tripled
      - A bunch of big companies went bankrupt
      - 14% of the workforce had to take paycuts (try getting that past the unions here)
      - Other countries (like the Netherlands) were forced to bail out their own taxpayers who had deposits in Icelandic banks (ie the taxpayer funded bailouts spread beyond Icelandic borders)

      The biggest part of the resolution to the problem was the simple fact that at the height of the issue, the government took over the banks. If that’s not taxpayer funded bailout then what is?

      The second biggest contributor to resolving the issue was that Iceland joined the EU, giving them access to the same sort of bailouts that Greece and the other basket cases are getting.

      Where does all the ECB’s money come from? Mostly from sale of government bonds, and the governments can then use to prop up the EU banking system. Who is eventually going to pay for all that government debt? That’s right, it’s taxpayers once again.

      So I’d ask you… is our system better or worse? Given that we’re not actually giving the banks a single cent?

    • James says:

      07:15am | 04/06/12

      Capitalism is a wondrous thing. Most people don’t know that the Federal Reserve in the US is not owned by the US Govet but is, in truth, a consortium of 12 major banks(may have changed?) plus some Govt Reps. What happens in simple terms is that the US fed govt gives money to these banks for nothing and then borrow it back at a small interest i.e. the banks buy govt bonds with the money. And where does the govt get the money in the first place? They just print it of course!
      And these bankers make vast fortunes by mismanaging the system to their own ends. Plus they become revered as masters of finance. Who is kidding who? Give me money for nothing I could become a financial genius as well.

    • Fred says:

      11:07am | 04/06/12

      Commie!

    • Ziggy says:

      11:24am | 04/06/12

      @Fred I don’t understand you response. He is correct. The Govt starts the corruption process at the source and then the banks distort the free market by their practices. So the little guy gets screwed from day 1. Goodbye individual freedom etc. He is the very opposite of being a Commie!

    • Fred says:

      01:40pm | 04/06/12

      I was joking. I 100% agree.

    • Ziggy says:

      02:31pm | 04/06/12

      I have yet to meet a Fred I didn’t like!

    • Grumpy says:

      02:45pm | 04/06/12

      One of the scariest things about the United Sates Federal reserve is that the american tax payer has become the equity for the loans the fed has given to the US government. Effectively making the Fed owners of the people of the united states themselves. Crazy shit.

    • Grumpy says:

      02:45pm | 04/06/12

      One of the scariest things about the United Sates Federal reserve is that the american tax payer has become the equity for the loans the fed has given to the US government. Effectively making the Fed owners of the people of the united states themselves. Crazy shit.

    • michael j says:

      07:22am | 04/06/12

      OK i need a PHD , Australians are paying 7 billion dollars a year to banks ?
      I thought the Government was guaranteeing depositors money if the said banked failed because of Fraud and to stop a run on the Banks while the GFC
      which is now ( haha ) over was on,
      the American Government has proved ( perhaps be complicit ) that it will bail out banks or investment Firms that commit Fraud ( GFC ) on such a scale that may cause a ripple in the Worlds eCONomy ,
      I may need a PHD but as long as the Australian Government does not help Australian Banks commit Fraud , and Banks stick to lending loans of % of gross income to perspective home-owners Australia will be OK,
      Thing is people have to live within their means and learn to go without things they don’t need ,,Power,Phone,Water n Food come to mind for Pensioners ,
      You all have a lovely day ,,

    • sir ronald bradnam says:

      08:04am | 04/06/12

      Capitalism and a true market driven economy are a myth that is perpetuated by the Government. All aspects of the economy are (mis)managed, tampered and tinkered with by Governements the world over to try and achieve their particular ideological dreams. This is the major cause of where the world economy is at now, its not the banks and the bankers fault, although they are complicit, make no mistake politicians and governments have created and assisted with the environs to allow this to happen.
      One of my biggest bugbears sine the start of the GFC was Swanny stopping the shorting of Bank stocks in australia to protect them as they were in trouble, but still allowing the trading arms of all the banking institutions to short the stocks of other businesses in trouble to line their own pockets. Good well thought out policy Wayne, not.

    • Ziggy says:

      08:24am | 04/06/12

      Absolutely correct! Unfortunately we allow ourselves to be governed by these unskilled people, most of whom could not successfully manage any small business. Despite what they say, they have no understanding of wealth creation. Their job is to remove barriers for those people who create the nations wealth. Incidentally you are too kind to the banks - most bankers I meet have a poor understanding of business. If you closely analyse their bad debts you can see how they distort our economy by risky lending to the big end of town while strangling the real wealth creators(small business) with odious credit policy.This practice stifles innovation and leads to inefficient monopolies.

    • Anna C says:

      09:10am | 04/06/12

      I totally agree.  I heard that Macquarie Bank had been very close to collapsing just before the bank guarantee came in.  How lucky for them that they were able to get an urgent meeting with Swanny to prevent this from happening.

    • GetRidOfCommies says:

      11:18am | 04/06/12

      The man speaks the truth. All forms of government regulation over the economy have at their heart communist and socialist impulses. The government has no right to interfere with any sectors of the economy.

      Just look what happens every time the goose pretending to be a swan pokes his fingers in the pie. He can’t help himself though. At heart Swan is the same as every other ALP politician - someone who enjoys telling people how to spend their money or run their business. Its a joke and it’s being played on all of us right now.

      Labor interference in our mining and banking sectors is very close to making the whole lot come crashing down. What a joke!!

    • year of the dragon says:

      03:57pm | 04/06/12

      Anna C says:09:10am | 04/06/12

      Whilst I am no friend of Mac Bank or of Wayne Swan, you heard wrong.

      Mac Bank has banking licence in Australia and must meet prudential requirements.

      This means that Australian banks are simply nob able to take on as much risk as they might like to.

      Had this not been the case, Mac Bank may well have gone broke.

      One of the things that shielded NAB during the 80s was that they were slow in getting involved in some of riskier activities that the more pro-active masters of the universe at their competitors got involved in. When everything went belly-up they looked like geniuses.

    • Expat Ozzie says:

      05:25pm | 05/06/12

      GROC: You live in a fantasy world if you think a fully deregulated economy is the way to go. Most of the problems in the US are precisely because of lax government regulation. Full deregulation is as much a utopian dream as communism.

    • Tubesteak says:

      08:37am | 04/06/12

      There’s a lot of mistakes underlying your argument.

      Firstly, Australian banks were never bailed out during the GFC by Australian taxpayers.

      Secondly, the GFC was caused by negligent US government involvement in the banking and residential sectors. The CRA and Glass-Steagall caused an unsustainable property bubble propped up by government lenders and lax lending standards. Naturally, since the problem was caused by government it’s up to the government to bail it out.

      Property isn’t just propped up by big paypackets in finance. There’s only a few bankers earning 7 figure salaries. The expensiveness of property in Sydney is caused by poor infrastrcture, lack of planning, our obsession with the qarter-acre block, NIMBYism, inflated incomes of tradies and leverage.

      Banks should be required to hold more capital. Capital adequacy requirements have been on the decline for years and this is because of government policy. Not much point blaming the banks for poor policy.

      The Robin Hood Tax is a stupid idea. Banks will just pass on the costs of the tax onto their consumers and we’ll all end up paying. A more equitable and fairer society would see us paying a flat income tax above a tax-free threshold and a higher consumption tax on a broad range of items. No other taxes.

    • Shane From Melbourne says:

      09:32am | 04/06/12

      Glass-Steagall was an act of Congress separating commercial banking from investment banking. Maybe the repeal of such regulations caused the bubble, but since the act has been around for more than 50 years I doubt that it one of the causes of the property boom and sub prime loans that caused the GFC.

    • Willie Mac says:

      10:03am | 04/06/12

      You mean the repeal of Glass-Steagall, right? Glass-Steagall was responsible for enforcing lending standards. While the government can be blamed for giving the banks the blank cheque of self-regulation, you can’t blame government for the disappearance of lending standards any more than you can blame them for people taking up smoking because cigarettes are legal. Nobody was forced to make NINJA loans, no matter how many myths people want to perpetuate about the Democrats forcing corporations to do so.

    • michael says:

      11:09am | 04/06/12

      Tubesteak, did you actually read the article?
      There is no suggestion that the Aussie banks were bailed out, the argument is that the big 4 banks have an improved credit rating due to the government providing an implicit guarantee to their creditors. This improvement to their credit rating results in them being able to borrow money at a better rate than their smaller, non guaranteed competitors (about 1/2 a percentage point cheaper).

      I’m not sure if you failed to read the article, or if you mentally re-wrote the article as you read it, so it became something your memorized talking points actually worked against.

    • Andrew says:

      12:11pm | 04/06/12

      I call it a bail out. The banks were facing insolvency according to Garnaut in this article: http://www.smh.com.au/opinion/politics/we-failed-the-gfc-test-20091026-hglk.html

      ‘‘The banks told (Rudd) that, if the Government did not guarantee their foreign debts, they would not be able to roll over the debt as it became due. Some was due immediately, so they would have to begin withdrawing credit from Australian borrowers. They would be insolvent sooner rather than later … The process of adjustment would be enormously disruptive and costly.’’

    • Tubesteak says:

      01:44pm | 04/06/12

      Shane and WM
      G-S was amended about the time of the tech crash. It widened the independence of banks and reduced regulatory oversight. Doing this in a market that was already over-inflated by cheap property and low insterest rates was doomed from the beginning. The causes of the GFC were set back in the 1970s and exacerbated just about every time the government did something. It just came to a head in 2009.

      It is up to government to regulate an economy that it interferes in. There is no such thing as a laissez-faire economy in this day and age. NINJA loans existed because the government created a climate where home ownership was thought of as a right and not a privilege. People had access to cheap credit and banks were forced to lend to certain people under the CRA which further distorted market prices and practices. It wasn’t just the Democrats. In 2004 Dubya put forth his commitment to cheapening credit and relaxing lending standards when he further changed the CRA.

      Michael
      Articles like this always come up with the “the banks were bailed out by the taxpayers and ours were the same” mantra. All regulated banks in this country have their deposits guaranteed by the RBA. Moreover, there really is no implied guarantee to creditors that only is for the Big4. All banks have the same guarantee or none of them do. There is no favouritism.

    • andye says:

      03:57pm | 04/06/12

      @Tubesteak - “People had access to cheap credit and banks were forced to lend to certain people under the CRA which further distorted market prices and practices”

      This is indeed the Republican spin. Facts, however, disagree. The truth is that the loans that were covered by the CRA were the minority of those that caused the GFC, and were actually pretty good. The majority of loans, which were unregulated by the CRA, were the problem. The worst loans came from companies with no oversight.

    • Traxster says:

      11:14am | 04/06/12

      To hell with the bloody banks they are a pack of shysters.
      I keep my money under my mattress…...........

    • just_the_pip says:

      11:41am | 04/06/12

      Traxster - a little thing called inflation may just cause that stash of money under your mattress to shrink at alarming rate.

    • sunny says:

      09:10pm | 04/06/12

      I keep all my money in my coin pocket.

    • Ziggy says:

      11:31am | 04/06/12

      @ Tubesteak You have totally misread the article. The Govt basiscally provided a ‘floor’ for our banks and so their credit ratings were artificially improved. And, yes, we as taxpayers would have had to pick up the bill if it all failed. The Govt gets it’s money, ultimately, from us.The major banks were given a massive competitive advantage against our smaller competitors.Long term result is less competition etc, etc. It weakens the economy long term so is not good policy.

    • Gerard says:

      11:35am | 04/06/12

      The point of the article is the Big 4 banks are getting a guesstimated $7 billion free insurance from you.
      This removes the threat of failure from them, undermining the core discipline keeper of capitalism. Sloppy prudence is rewarded. How can they go wrong?

      They can even give us the big finger for expecting them to fairly track interest rates.
      The well paid board members are laughing all the way to the bank every morning in disbelief.

    • RonaldR says:

      12:24pm | 04/06/12

      you people talking about Glass-Steagall don’t know what you are talking about ,we need Glass-Steagall to be introduced to save us from the banks. The banks and their corrupt populations ended Glass-Steagall decades ago in the USA . That’s why now why Governments around the world have to bail these gambling banks out for billions . in the USA there is a growing call for bring back Glass-Steagall   also there is a call in areas to introduce it and we need it here in Australia .

    • Knemon says:

      02:05pm | 04/06/12

      I love the cartoon attached to this article…that’s all. grin

    • AnthonyG says:

      09:40pm | 04/06/12

      What shits me is the Gubberment makes super compulsary but wont guaranteee them but if you are a public servent or a half pie criminal pollititcian your super is even guaranteed to earn at least 10% per year

    • Plain Jane says:

      02:02pm | 05/06/12

      “Guaranteed to earn at least 10% per year”

      What? Who on earth told you that? It doesn’t look even remotely possible.

      Did you even bother to check, for goodness sake?

      Go on. look it up. Tell us the earning rate of any of the federal employee funds in the last year or so.

      It won’t be hard.  Hint: You’ll just need Google and one original source. Not a media or political party summary.

      Oh never mind. I’m too busy to hang around for this sort of silliness. I’m not even in the public service, and it took me under a minute to find the returns from one of the main federal super funds.

      Monthly allocated earning rates of the Public Sector Super Fund - frome their own site

      Jun 2011
      -0.499 %

      Jul 2011
      -1.270 %

      Aug 2011
      -1.421 %

      Sep 2011
      -1.305%

      Oct 2011
      3.553 %

      Nov 2011
      -1.854 %

      Dec 2011
      0.317% %

      Jan 2012
      2.190 %

      Feb 2012
      1.183 %

      Mar 2012
      1.263 %

      Apr 2012
      0.419 %

      May 2012
      -1.488 %
      http://www.pss.gov.au/tools/investments/earnings/index.shtml


      So much for ““Guaranteed 10%”!  For goodness sake!

      Who feeds you people this utter nonsense? Who is making up this crap?

 

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