Bank Levies in Australia: Lessons from Europe

Bank Levies in Australia: Lessons from Europe *

**

Mary Dowell-Jones & Ross P Buckley

Australia introduced deposit insurance in 2008 at the height of the financial crisis. It is currently funded on an ex post basis. Funds are not set aside to meet claims on the scheme; instead, the Government will reimburse insured depositors should an Authorised Depository Institution (ADI) fail, and will then recover the costs through liquidation. The Government is proposing moving to an ex ante funding model by introducing a levy of 0.05% on insured deposits to build up a Financial Stability Fund to meet claims. Moving to ex ante funding would bring Australia into line with international recommendations. However, clarity is needed on key points, such as the size of fund required and whether it would be used for bank resolution more generally in a crisis. Careful consideration of the design the levy is needed so it does not disproportionately disadvantage smaller banks which rely more on retail deposits for funding. This paper considers the current proposals in light of international principles and emerging best practice. It considers how deposit insurance schemes in the UK, France and Germany are funded; and analyses the separate financial stability bank levies in these countries introduced to recoup some of the costs of public sector support during the crisis and to fund a separate bank resolution regime.

The Australian Government is currently considering introducing a bank deposit tax to prefund its depositor protection scheme – the Financial Claims Scheme (FCS) - which Australia introduced at the height of the financial crisis in 2008. It initially covered deposits up to AU$1 million per depositor per institution, which was subsequently reduced to AU$250,000.1 It is funded on an ex post basis – should an authorised deposit taking institution (ADI) fail, the Government will compensate depositors out of general revenue, and then recover those funds from the failed institution through the liquidation process. The Government can impose a levy on remaining banks to make up for any shortfall in the funds recovered through the liquidation process. The Government is now considering whether to introduce a bank levy or deposit insurance fee in order to build up a Financial Stability Fund which would be

*

Research Fellow, Faculty of Law, University of New South Wales; Fellow, Human Rights Law Centre, School of Law, University of Nottingham. **

CIFR King & Wood Mallesons Professor of International Finance Law, and Scientia Professor, University of New South Wales; Honorary Fellow, Asian Institute for International Finance Law, University of Hong Kong; email: [email protected]. We would like to thank King & Wood Mallesons, and the Australian Research Council Discovery Project DP130103501, for the funding which has supported this research. All responsibility is the authors’. 1

See http://www.cfr.gov.au/about-cfr/financial-distress-planning-management/financial-claims-scheme.html for details; G. Turner: Depositor Protection in Australia, Reserve Bank of Australia Bulletin, December 2011 p. 4555.

1

used to finance the FCS. That is, it is considering moving Australia’s deposit insurance scheme to an ex ante funding model, as is common abroad.2 Moving to an ex ante funding model is in line with international recommendations. The Core Principles on Effective Deposit Insurance Systems (Core Principles), endorsed by the Financial Stability Board, recommend an ex ante funding model on the basis that the scheme should have readily available funds and the cost of deposit insurance should be borne by banks.3 Similarly, the recent EU Directive on Deposit Guarantee Schemes, which will harmonise arrangements across the EU, requires member states to adopt an ex ante funding model.4 The United States also uses an ex ante model.5 Indeed, an IMF survey last year found that 88% of countries with deposit insurance funded it ex ante.6 In light of the lessons from the global financial crisis, the current proposals raise key questions, including the need for clarity as to the purpose of the fund, and the scale of fund required to fulfil that purpose. This paper will summarise current proposals in Australia, and compare them to experience in the UK, France and Germany, that have long had regimes to fund deposit insurance and since 2011 have had a levy for financial stability and bank resolution. While ‘bank levy’ is used interchangeably in the literature and regulatory pronouncements for both types of charge, for clarity this paper differentiates a ‘deposit insurance fee’ from a ‘bank levy’ of the kind introduced in Europe post-crisis. I.

Funding the Financial Claims Scheme in Australia:

In April 2015, Australian Treasurer Joe Hockey said the Government intended to introduce a fee of 0.05% on insured deposits up to AU$250,000 in the May budget, to come into effect in January 2016. This is estimated to raise approximately AU$500 million a year, with the proceeds to be used to build a Financial Stability Fund to finance claims on the FCS should an ADI fail. In supporting the case for a move to an ex ante funding model, he argued: “there’s very few countries that impose a levy after failure … Self-evidently, because the four major banks in Australia basically have the same business model, if there is a financial failure … of any scale, it would have systemic ramifications … So you’re not going to impose a tax on … whoever’s left.”7 However, the deposit insurance fee was not included in the May 2015 budget, and the Government has confirmed it has not yet made a decision and will do so as part of its response to the Financial System Inquiry later in 2015.8 2

See Turner: Depositor Protection in Australia, supra, p.52 for a summary of deposit insurance schemes in other major jurisdictions. Notably, Australia’s threshold of AU$250,000 far exceeds that of other major financial centres. In France and Germany the limit is €100,000 (AU$143,000); in the UK £85,000 (AU$170,000); and in Japan ¥10 million (AU$105,000). Only the United States has a higher limit of US$250,000 (AU$326,000). 3

International Association of Deposit Insurers: IADI Core Principles for Effective Deposit Insurance Systems, November 2014, Principle 9, p. 29. 4

EU Directive 2014/49/EU of 16 April 2014 on Deposit Guarantee Schemes, para. 27.

5

See Federal Deposit Insurance Corporation website for details: https://fdic.gov/.

6

A. Demirgiic-Kunt, E. Kane & L. Laeven: Deposit Insurance Dataset, IMF Working Paper WP/14/118, July 2014, p.12. However, certain major jurisdictions like the UK and Switzerland use ex post models. 7

‘Joe Hockey makes case for bank deposits tax’, The Australian Financial Review, 12 April 2015. See also ‘Tax on bank deposits in federal budget’, The Australian Financial Review, 28 March 2015. 8

Mathias Cormann: Transcript: Doorstop – Mural Hall, Parliament House, Canberra, 11 May 2015, available at: http://www.financeminister.gov.au/transcripts/2015/0511-doorstop-mural.html. See also ‘Federal budget 2015: Superannuation slugged by means test and low rates’, The Australian Financial Review, 6 May 2015.

2

A fee to fund the FCS ex ante was first proposed by the Labor Government in 2013. It announced it would: “progress a recommendation from the Council of Financial Regulators … to establish a dedicated Financial Stability Fund to help meet any future cost of the Financial Claims Scheme (FCS), as well as the cost of other resolution activities that protect depositors. The dedicated Fund will build gradually over time to a target size of 0.5 per cent of total deposits protected by the FCS.”9 The incoming coalition Government referred this proposal to the Financial System Inquiry (FSI) for consideration. The FSI recommended keeping the ex post funding model for the FCS. They argued an ex ante fee “would be an ongoing cost for all ADIs” and that as their recommendations would strengthen the resilience of the Australian banking sector, “the case to charge an ex ante levy for the FCS” is weakened.10 The FSI final report did, however, acknowledge that an ex ante model has the advantages of being based on user-pays, that it would “enable levy funds to be deployed to aid in wider ADI resolution purposes” and that it offered the potential to build a fiscal buffer.11 These acknowledgements in the final report reflect the submission to of the Reserve Bank of Australia (RBA) that argued for the introduction of a fee. They noted that ex ante funding is common practice internationally, and is based on the principle of “users paying for the benefit provided.” 12 Further: “Ex-ante funding would also, at least partly, compensate the Government for the risks it bears from these [deposit] guarantees and would build a fiscal buffer to assist in meeting any potential future costs of ADI resolution.”13 They suggested that the fee could either be based on a flat rate calculation, where all ADIs are levied at the same rate, or on a risk-adjusted basis where the rate of fee would be higher for higher-risk institutions. They acknowledged that while: “a risk-based fee has conceptual merit from riskpricing and incentives perspectives, it is more complex to design and administer.”14 The RBA further argued that the proceeds of the fee could be used for a range of purposes beyond simply compensating insured depositors: “While FCS-protected deposits could be used as the assessment base for pricing purposes, this does not mean the proceeds from ex-ante funding should be used only for FCS payouts in a closed resolution. Allowing for a wider use of the proceeds, in particular for open resolution as well, would be more useful than using the funds only to reimburse insured deposits, given the funds would be available for use in a broader range of circumstances.”15

9

Commonwealth of Australia: Economic Statement August 2013, Statement by the Hon. Chris Bowen MP, Treasurer and Senator Penny Wong, Minister for Finance and Deregulation, Commonwealth of Australia, p. 3334, available at: http://www.budget.gov.au/201314/content/economic_statement/download/2013_EconomicStatement.pdf. 10

Financial System Inquiry: Final Report, November 2014, p. 83.

11

Ibid.

12

Reserve Bank of Australia: Submission to the Financial System Inquiry, March 2014, p. 61, available at: http://fsi.gov.au/files/2014/04/Reserve_Bank_of_Australia.pdf. 13

Ibid.

14

Ibid.

15

Reserve Bank of Australia: Submission to the Financial System Inquiry, March 2014, p. 61-62, available at: http://fsi.gov.au/files/2014/04/Reserve_Bank_of_Australia.pdf. Closed resolution is when a failed institution is

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II.

Design Issues in Funding Australia’s Deposit Insurance:

In light of these issues, there are four key questions the Government needs to address: a) What is the fund for? b) What scale of fund is required to effectively fulfil that purpose? c) What size of deposit insurance fee is necessary to build up that fund? d) Should the fee be flat rate or risk-adjusted? The first question is whether the Financial Stability Fund is to be used simply to cover insured deposits, or as a resource to help fund broader resolution efforts? The Core Principles acknowledge that since the crisis, “a number of deposit insurers saw their mandates expand to include resolution tools”16 and they include the possibility that a deposit insurer could “authorise the use of its funds for resolution of member institutions”.17 The Core Principles see deposit insurance as part of the broader post-crisis resolution framework. The EU Directive on Deposit Guarantee Schemes also admits the possibility that DGS funds could be used for other purposes: “It should also be possible, where permitted under national law, for a DGS to go beyond a pure reimbursement function and to use the available financial means in order to prevent the failure of a credit institution with a view to avoiding the costs of reimbursing depositors”.18 The RBA’s suggestion that the fund could be used for broader resolution purposestherefore reflects international thinking, and the Government needs to be very clear on the scope of the Fund’s powers. The role of the Fund raises the pointed questions of the size of fund and related fee that are required. The Core Principles recommend that: “the target fund size [should be] determined on the basis of clear, consistent and transparent criteria” and that “a reasonable time frame is set to achieve the target fund size.”19 The current proposals will raise an estimated AU$500 million a year to build up a fund equivalent to 0.5% of covered deposits. These amounts are arguably insufficient to fulfil a credible deposit insurance role, let alone provide sufficient funds for resolution activities. Eligible deposits covered by the FCS are around AU$722 billion.20 A fund of 0.5% of covered deposits would hold only AU$3.6 billion. According to figures from APRA, 14 banks in Australia hold combined deposits of AU$697 billion; of which the big four (ANZ, Commonwealth Bank, NAB, Westpac) have combined deposits of AU$589bn.21 In the context of this highly concentrated market, it is questionable whether a fee raising AU$500 million a year is enough to provide credible resources to cover insured liabilities. As APRA closed to new business and liquidated; open resolution is where core functions are transferred to another entity or the failed entity is recapitalised. 16

IADI Core Principles, supra note Error! Bookmark not defined., p. 6.

17

IADI Core Principles, supra note Error! Bookmark not defined., Principle 9, para. 8.

18

EU Directive 2014/49/EU, supra note Error! Bookmark not defined., para. 16.

19

IADI Core Principles, supra note Error! Bookmark not defined., Principle 9, para. 5.

20

Australian Prudential Regulation Authority: Annual Report 2014, October 2014, p. 153. Figures at 31 December 2013. 21

Australian Prudential Regulation Authority: Monthly Banking Statistics, April 2015, Table 4: Deposits on Australian books of individual banks.

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has noted in relation to the FCS: “[i]t is not possible to estimate the amounts of any eventual payments that may be required in relation to these [FCS] claims and as such no amount is included” in the schedule of contingencies on the financial statements.22 Admittedly, a fund of 0.5% of deposits is broadly in line with current international practice. The EU Directive contains a target coverage level of at least 0.8% of deposits,23 which is higher than many European jurisdictions currently have.24 The authors of the IMF study argue that deposit insurance schemes appear underfunded. They highlight the imbalance between the ability to pay and potential liabilities from deposit insurance, and indicate that under-funded schemes rely on Governments as a backstop. The IMF notes that during the financial crisis, there was a substantial expansion in deposit insurance coverage in crisis countries.25 In 2009 the US Federal Deposit Insurance Corporation required all banks to prepay three years of premiums in order to shore up the deposit guarantee scheme as it rapidly ran short of funds.26 The size of the anticipated fund means in the event of the failure of all but one of the smallest of our ADIs, the Government will have to outlay very significant sums and then wait years to recover them through the liquidation process. The Government also needs to think about the competitive impact of a deposit insurance fee on the Australian banking sector. A flat rate fee, as currently proposed, is the easiest to administer, but will also be the easiest for banks to pass straight on to customers in the form of higher fees or lower interest rates on deposits.27 It will also have a disproportionate impact on the smaller savings banks which rely mostly on retail deposits as a source of funds.28 The big four banks rely more heavily on wholesale funding, and so will be proportionately less impacted. Yet these institutions pose the greatest systemic risks and benefit the most from the implicit Government subsidy because of their ‘too big to fail’ status. This is the rationale behind the Green’s proposal for a fee of 0.2% on bank assets above a AU$100 billion threshold, to be applied only to the big four banks.29 The Greens see this as a way to level the playing field, as the big four banks’ risk adjusted internal capital models allow them to operate on lower capital levels, thereby placing smaller regional banks at a disadvantage. The Government may consider a risk-adjusted fee. This would also align Australia with the Core Principles and US and EU approaches.30 According to the IMF, approximately 30% of high income countries use risk adjusted premiums, including France, Hong Kong SAR, Italy and the United States, and the number 22

Ibid.

23

EU Directive 2014/49/EU, supra note Error! Bookmark not defined., Art. 10.

24

Deposit Insurance Dataset, supra note Error! Bookmark not defined., Table 5: Fund Size and Coverage of Existing DIS. 25

Deposit Insurance Dataset, supra note Error! Bookmark not defined., p.14.

26

D. Ellis: Deposit Insurance Funding: Assuring Confidence, Federal Deposit Insurance Corporation Staff Paper, November 2013, p. 7-8, available at: https://www.fdic.gov/deposit/insurance/assuringconfidence.pdf. 27

‘CBA says deposit tax may be passed on to customers’, The Australian Financial Review, 1 April 2015.

28

‘Small banks say they will suffer from proposed deposit levy’, Sydney Morning Herald, 30 March 2015.

29

‘Hockey’s Deposit Levy Should Only Apply to Big 4 Banks: Greens’, Green Party Press Release, 30 March 2015; ‘Greens Back COBA’s New Bank Levy Campaign’, Green Party press Release, 16 June 2014; Parliamentary Budget Office: Costing – Banks – Public Support Levy, February 2013, available at: http://greensmps.org.au/sites/default/files/pbo_costings_20130213_banks_public_support_levy_2.pdf. 30

IADI Core Principles, supra note Error! Bookmark not defined., p. 11; EU Directive 2014/49/EU, supra note Error! Bookmark not defined., para. 36; https://www.fdic.gov/deposit/insurance/.

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has been increasing since the crisis.31 Although Germany has used a flat rate premium, it will now move to a risk-adjusted premium under the EU Directive on Deposit Guarantee Schemes.32 A risk adjusted fee can be structured in different ways to avoid the larger banks using their more sophisticated risk systems to reduce their liability. The EU Directive specifies that contributions should take into account the risk profile of different business models, the asset side of the balance sheet and risk indicators such as capital adequacy, asset quality and liquidity.33 The European Banking Authority’s guidelines on calculating contributions to deposit guarantee schemes set out five categories of risk indicators: capital, liquidity and funding, asset quality, business model and management, and potential losses for the DGS. These are further broken down into key indicators, and supplemented by additional indicators such as sector concentrations in the loan portfolio, excessive balance sheet growth ratio, and off balance sheet liabilities as a share of total assets.34 The International Association of Depositary Insurers (IADI) General Guidance for Developing Differential Premium Systems also outline a range of options, as well as providing examples of how different countries structure their risk based premiums.35 In 2011, the Council of Financial Regulators considered different options for pre-funding the FCS. It was noted that risk-adjusted fees can be charged in different ways and at different levels, and that there is also the possibility of a hybrid fee structure as used in Norway and Finland. These use fixed fees of 0.05-0.10% on insured deposits, with an additional fee based on solvency measures.36 There are therefore different options available to Australia for structuring a risk-adjusted premium in a way that is most suited to capturing risks in the banking system. III.

European Experiments with Bank Levies:

The UK, France and Germany have fees to fund deposit insurance and separate bank levies to fund financial stability/crisis resolution, and their deposit insurance schemes have significant differences. They therefore offer interesting insights for Australia. The UK has an ex post funded deposit insurance scheme (the Financial Services Compensation Scheme).37 Fees for the scheme are calculated and levied on the basis of the amount of compensation that is expected to be paid out in the following 12 months.38 It is therefore ad hoc, and based on an assessment of need rather than raising a target amount of funds, and can differ markedly from year to year. In 2009/10 £230,000 was raised from the 31

Deposit Insurance Dataset, supra note Error! Bookmark not defined., Figure 10: Risk Adjustment of DI Premiums, 2013, p.27; Table 3: Design of Explicit Deposit Insurance Schemes Around the World, end-2013, p.37. 32

EU Directive 2014/49/EU, supra note Error! Bookmark not defined., para. 36.

33

EU Directive 2014/49/EU, supra note Error! Bookmark not defined., Art. 13(2).

34

European Banking Authority: Guidelines on Methods for Calculating Contributions to Deposit Guarantee Schemes, Doc. No. EBA/GL/2015/10, 28 May 2015, Table 1: Risk Categories and Core Risk Indicators, p.2022; Annex 2: ‘Description of Core Risk Indicators’, p.38-40; Annex 3: Description of Additional Risk Indicators, p.41-15. 35

International Association of Deposit Insurers: General Guidance for Developing Differential Premium Systems, October 2011. 36

Council of Financial Regulators: Pricing Arrangements of Pre-Funded Deposit Insurance Schemes, Note 121304/8, 19 January 2011, available at: www.rba.gov.au/foi/disclosure-log/pdf/121304.pdf. 37

http://www.fscs.org.uk/.

38

Financial Conduct Authority: Fees Manual, Part 6: Financial Services Compensation Scheme Funding, para. 6.3.1(2), available at: https://fshandbook.info/FS/html/FCA/FEES/6.

6

banking sector, whereas in 2012/13 the amount was £15.33 million.39 The fee is levied annually, but can be supplemented by an interim levy if necessary to meet claims.40 In contrast, France’s deposit insurance scheme (the Fonds de Garantie des Depots et de Resolution)41 is pre-funded on the basis of a complicated risk-adjusted calculation. The Minister of Economy, Finances and Industry decides annually what funds need to be raised from insured institutions and the Prudential Regulatory Authority then issues calculations of the fee based on a complicated risk-adjusted formula.42 The Fund currently holds some €2.1 billion43, and the amount of fees to be raised was set at €500 million for 2014.44 Germany has a more complicated deposit insurance structure with both a statutory deposit insurance scheme (the Entschädigungseinrichtung deutscher Banken)45 and a private scheme operated by the Association of German Banks.46 German banks pay into the statutory fund an annual payment of 0.016% of liabilities to customers. In addition, deposit taking institutions that have more than 3 years of annual accounts have to make a one-off payment of 0.1% of the assessment base, of no less than €30,000.47 Contributions to the private scheme are 0.6% of liabilities to customers.48 The assessment base for contributions is much broader than under other schemes. However, the funds have been criticised by the IMF as complicated and lacking transparency as “no information on the financial condition of the various schemes is made publically available in an accessible format.”49 According to IMF data, the fund held some US$5.09 billion in 2010.50

39

Financial Services Claims Scheme: FSCS Levies Raised, 2008/09 to 2013/14, available at: http://www.fscs.org.uk/uploaded_files/Industry/total_levies_raised_180713.pdf. 40

Memorandum of Understanding Between the Financial Conduct Authority and the Financial Services Compensation Scheme, available at: http://www.fscs.org.uk/uploaded_files/mou_fscs_-_fca_.pdf; See Financial Services Compensation Scheme Levy Calculation Notes: 2013/14 Rates for details and a sample calculation, available at: https://www.fca.org.uk/static/fca/documents/fscs-notes-2014.pdf. 41

http://www.garantiedesdepots.fr/en.

42

Autorite de Controle Prudentiel et de Resolution: Instruction no 2009-04 du 19 juin 2009 modifiee par l’instruction no 2010—I-09 du 13 decembre 2010 relative aux remises complementaires pour le calcul des contributions dues par les etablissements assujettis aux systemes de garantie des depots, des titres et des cautions, 13 December 2010, available at: http://acpr.banquefrance.fr/fileadmin/user_upload/acp/Textes_de_reference/Instruction-2009-04-garantie-des-depots-titrescautions-version-consolidee-2010.pdf?xtmc=&xtnp=1&xtcr=3. 43

See http://www.garantiedesdepots.fr/en/fonds-de-garantie-des-depots-et-de-resolution/financing-andmanagement-fgdr for financing details. 44

Arrete du 3 novembre 2014 relatif au montant des cotisations au mecanisme de garantie des depots pour 2014, Journal Officiel de la Republique Francaise (JORF) no. 0261, 11 November 2014, p. 19017, text no. 11, available at: http://legifrance.gouv.fr/eli/arrete/2014/11/3/FCPT1424835A/jo/texte. 45

http://www.edb-banken.de/.

46

https://bankenverband.de/.

47

Federal Financial Supervisory Authority (BaFin): Regulation on Contributions to the Compensation Scheme of German Banks, 10 July 1999 amended 17 August 2009, Sections 1&2, available at: http://www.bafin.de/SharedDocs/Aufsichtsrecht/EN/Verordnung/EdBBeitvV_en.html. 48

Bundesverband Deutscher Banken e.V.: By-Laws of the Deposit Protection Fund of the Association of German Banks, August 2014, p. 13. 49

IMF: Germany: Technical Note on Crisis Management Arrangements, IMF Country Report no. 11/368, December 2011, at p. 21. See p. 20 for an overview of the deposit insurance arrangements. 50

Deposit Insurance Dataset, supra note Error! Bookmark not defined., Table 5: Fund Size and Coverage of Existing DIS.

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The IMF has noted that: “[t]here is an important distinction between the function of guaranteeing (small) depositors and financing bank resolution.”51 The financial crisis led to a wide-ranging debate on crisis resolution tools and it has been recognised that deposit insurance schemes are only one part of a resolution framework. Many European countries have now introduced separate financial stability bank levies, alongside their deposit insurance schemes.52 The aim of these levies is broadly: to fund a new pan-European resolution fund; to compensate taxpayers for the funds that were made available to bail out banking sectors during the crisis; and as a regulatory tool to encourage a move to longer-term, less risky funding sources. While the levies have been implemented differently in the UK, France and Germany, they provide a useful case study for Australia in considering options for the design of a new deposit insurance fee. The UK bank levy, introduced on 1 January 2011, is paid into general revenue and has raised just over £8 billion in four years.53 It is charged on the global consolidated balance sheets of UK headquartered banks and building societies, and the UK subsidiary and branch balance sheets of foreign banks in the UK. There are certain exclusions such as Tier 1 capital and insured retail deposits, and the first £20 billion of liabilities which removes smaller building societies and credit unions from the scope of the levy.54 The levy was initially introduced at a rate of 0.05%, with a half rate of 0.025% for longer term liabilities, i.e. those with more than one year to maturity at the assessment date.55 This was to compensate taxpayers for the assistance provided during the crisis and the ongoing implicit subsidy that banks enjoy, and to encourage a move away from risky, short-term funding. The rate is presently 0.21%, with a half rate of 0.105%.56 There has been an extraordinary instability in the rate of the levy, with the UK Government increasing it nine times as it has tried to hit is revenue target of £2.5 billion a year. This has now been achieved, with the levy raising £2.7 billion in the 2014-15 tax year, up from £1.6 billion in its first year of operation.57 The main bulk of the levy is paid by the big four UK banks. The French bank levy was also introduced on 1 January 2011, at a flat rate of 0.25% of risk weighted assets with the aim of discouraging excessive risk taking and compensating the State for the costs of any future resolution activity.58 The French levy is potentially wider in scope than the British levy, as it is applied to all financial entities regulated by the French prudential supervisory authority. However, those with risk weighted assets below €500 million are exempt, which means that in practice only 16 entities pay the levy.59 The levy 51

IMF: European Union: Financial Sector Assessment Program – Technical Note on Deposit Insurance, IMF Country Report no. 13/66, March 2013, para. 10. 52

This drew on guidance in an IMF report prepared for the G20, S. Claessens, M. Keen & C. Pazarbasioglu: Financial Sector Taxation: The IMF’s Report to the G20 and Background Material, Washington D.C., IMF, 2010. For an overview of European bank levies see KPMG: Bank Levies: Comparison of Certain Jurisdictions, London, KPMG, June 2012. 53

A. Seely: Taxation of Banking, House of Commons Standard Note SN5251, 27 May 2014; HM Revenue and Customs: HMRC Tax & NIC Receipts: Monthly and Annual Historical Record, 22 May 2015, p. 6. 54

Taxation of Banking, supra note 53, p. 20;

55

HM Revenue & Customs: Bank Levy, Tax Information and Impact Note (TIIN) 1065, 9 December 2010.

56

HM Revenue & Customs: Bank Levy: Rate Change, Tax Information and Impact Note (TIIN), 18 March 2015. 57

HMRC Tax & NIC Receipts, supra note 53, p. 6.

58

Bulletin Officiel des Finances Publiques – Impots: TFP – Taxe de risqué systemique des banques, April 2014.

59

French Senate: Projet de loi de finances rectificative pour 2012: rapport, available at: http://www.senat.fr/rap/l11-689-1/l11-689-128.html.

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was doubled in 2013 to 0.50%, because of the shortfall in receipts compared to the British levy – it raised €550 million in 2012-13, compared to £1.6 billion for the UK bank levy.60 In 2014, the levy was raised by a further 0.039%, with the extra being used to fund assistance to French local governments, municipalities and hospitals that had been mis-sold complex structured debt products by banks including the nationalised Franco-Belgian bank Dexia, that were causing severe financial difficulties for public authorities.61 The French levy has raised €2.8 billion in four years, with the proceeds being paid into general revenue.62 There was an initial discussion over whether to use the proceeds to establish a dedicated resolution fund, but it was felt this would contribute to moral hazard.63 However, from 2016, France will be part of the new EU Single Resolution Fund (SRF) – a dedicated pan-EU resolution fund operating under the auspices of the Single Resolution Mechanism. The existing levy will therefore be phased out by 2019, to be replaced by a new levy paid to the EU SRF.64 The German bank levy, introduced on 1 January 2011, is distinguished from the UK and French examples as its rate has remained stable, and it has been paid into a dedicated Resolution Fund which from 2016 will merge with the EU Single Resolution Fund. The German levy is structured to be proportionate to bank size. Larger banks pay a higher rate. The rates range from 0.02% to 0.06%; with: 0.0003% payable on the nominal face value of derivatives, both on- and off-balance sheet.65 There is a minimum threshold of balance sheet liabilities less than €300m, which excludes smaller banks with stable, retail deposit-financed funding sources from its ambit. As a result, only around 25% of banks are captured by the levy, with the largest commercial banks paying a large share.66 The structure of the German levy therefore shifts the burden primarily onto those banks using market funding for their activities, over smaller, more conservatively funded banks. The German levy has raised just over €2 billion since 2011.67 The target size of the German resolution fund is €70 billion, with the agency responsible empowered to impose extra levies on banks if it is required to undertake resolution actions for which the costs cannot be met 60

Projet de loi de finances rectificative, supra; HMRC Tax & NIC Receipts, supra note 53, p. 6.

61

Assemble Nationale: Projet de loi de finances pour 2014, Art. 23 & 60, 25 September 2013. The proposed rise to 0.529% was subsequently increased to 0.539% in the enacted Finance Law 2014, see Art. 35 of Law no. 2013-1278 of 29 December 2014. 62

Projet de loi de finances, supra note 59; Federation Bancaire Francaise: La taxation du secteur bancaire a un impact sur le financement de l’economie, Fiche Repere, 4 March 2014; Assenblee Nationale 14eme Leigslature: Question no. 63864 & Response, Journal Officiel, 23 December 2014, p. 10738. 63

J.-F. Lepetit: Rapport sur le risque systemique, French Ministry of Economy, Industry & Employment, April 2010, p.5. 64

Assemble Nationale: Projet de loi de finances rectificative pour 2014, Art. 14. For details of the EU Single Resolution Mechanism see: http://ec.europa.eu/finance/general-policy/banking-union/single-resolutionmechanism/index_en.htm. 65

OECD: Revenue Statistics 2013, at p. 48; see also FMSA: Jahresbeitrag – Ubersicht, available at: http://www.fmsa.de/export/sites/standard/downloads/Schaubild_Berechnung_Jahresbeitrag.pdf. 66

C. Buch, B. Hilberg & L. Tonzer: Taxing Banks: An Evaluation of the German Bank Levy, Deutsche Bundesbank Discussion Paper no. 38/2014, March 2014, p. 13. 67

FMSA Press Release: ‘Jahresabschluss 2011 Restrukturierungsfonds und FMSA’, 14 May 2012; FMSA Press Release: ‘Jahresabschluss 2012 Finanzmarktstabilisierungsfonds (SoFFin)’, 13 May 2013; FMSA Press Release: ‘Bankenabgabe 2013 belauft sich auf 520 Mio. Euro’, 22 November 2013; FMSA Press Release: ‘Bankenabgabe 2014 belauft sich auf 516 Mio. Euro’, 6 November 2014.

9

from available funds.68 The German bank levy will become the contribution to the new EU Single Resolution Fund from 2016, though the size of levy payable is still being calculated. IV.

Conclusion

While a move to ex ante funding would bring Australia into line with other jurisdictions and the Core Principles, the Government needs to carefully consider the available options for the design of its deposit insurance fee. Deposit insurance schemes are one part of broader resolution frameworks, and the scale of resolution costs in the event of a banking crisis can run into the hundreds of billions of dollars. As Joe Hockey pointed out, it is inconceivable that failure of one Australian bank would not create or contribute to problems at the other banks. There therefore needs to be a hard-headed look at what scale of fund is required to support the Government’s policy objectives and what size of fee is necessary to achieve that within a reasonable timeframe. As the UK learnt with Northern Rock, the existence of deposit insurance neither prevented a run on the bank, nor contagion across market structures to other market participants. The Government needs to think hard about what it aims to achieve with a deposit insurance fee, and whether it is enough to underpin banking stability given the lessons of the financial crisis. Experience in European jurisdictions, notably the UK, France and Germany, suggest that Australia could consider a higher fee than 0.05%, and also separate fees for depositor protection and a resolution fund. The UK, France and Germany have designed and implemented their deposit insurance fees and bank levies differently, but all three have exclusions which greatly reduce the impact upon smaller banks which are considered to pose less risks to financial stability.

68

See information on the Financial Market Stabilisation Fund (SoFFin) on the website of the Federal Agency for Financial Market Stabilisation (FMSA) for details: http://www.fmsa.de/en/fmsa/restructuring-fund/banklevy/index.html.

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