Keeping the cash from the coffers

02 August 2013

ANU Chair in Public Policy Professor Warwick McKibbin has welcomed the idea of a bank deposit levy to cushion the banking system against future shocks, but warned that the money raised must be managed independently and away from government coffers.

The government today announced a .05 per cent levy on bank deposits up to $250,000. The levy is aimed at protecting investors in the event of a bank collapse.

But speaking to ABC Radio National’s Breakfast show on Friday, McKibbin, a former board member of the Reserve Bank of Australia, warned that money raised should not go into government revenue.

“If it’s purely a revenue grab and it’s just going to go in to consolidated revenue to make a fiscal position look better, that’s not a very good signal to send,” he said.

“It’s much better if it’s done like the Future Fund which funds the liabilities of retired public servants. This should be an independent fund that’s managed for the sole purpose of providing insurance if it’s ever required.”

Some commentators have warned that any levy imposed on banks will be passed on to consumers. McKibbin agrees this is almost inevitable.

“In the Australian banking system we have a concentration of large banks, so you’d likely get this passed on to depositors. But some part of it would also be passed onto shareholders in the sense that they were getting something for nothing before, and now the value of the bank will be slightly affected by the fact that now they have to pay for this guarantee from government.

“[But] the principle here is to make it explicit that someone has to pay for the cost of this implicit insurance, and really the depositors and the banks themselves should be doing the paying, rather than general taxpayers.”

He added that while he thought the levy was a good idea, he didn’t expect it to be needed any time soon.

“This is for a crisis that could be very big in scale,” he said.

“If you don’t have the funds put aside, and you have to take them out of consolidated revenue in the future as an expenditure item, that could create a fiscal crisis as well as a banking crisis. We saw that happen in Spain and Portugal over the last five years.

“That’s what you want to avoid and that’s why you need to have this fund building up independently of current government spending because it’s there for a rainy day – just like we should’ve had a rainy-day fund for the boom. We should get this one right, given we got the last one wrong.”

To listen to the full interview:

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