The four major banks (NAB, Commonwealth Bank, ANZ and Westpac) have announced they are on track to post record annual profits of a staggering $30 billion.
Having strong, well run, major banks is a good thing. The problem is that the pendulum has swung too far towards stability and too far away from competition.
The major banks have obtained these results because of an unfair competitive advantage. The profits can be used to further erode the competitiveness of Australia’s banking system. Record profit is good news for those fortunate enough to have shares in banks but it is ultimately hurting local consumers and businesses.
Other financial institutions that are trying to keep the banks honest, offering competition to drive rates down (for mortgage holders) and up (for investors,) are competing hard but the playing field is not level. The implications are significant for many regions where The Greater operates as a disproportionate number of people bank with a customer-owned financial institution (building society or credit union) rather than a major bank.
The Treasurer can help level the playing field and many people in tonight’s Budget and through the Government’s response to the Financial Services Inquiry.
Customer-owned financial institutions and experts are calling for a package of fiscally responsible measures to be introduced including a levy on the major banks to recognise the financial benefit the big four receive from their ‘too big to fail’ government guarantee.
The International Monetary Fund has said that Australia’s ‘four major banks enjoy a funding cost advantage derived from an implicit government guarantee, and should bear some of the cost of mitigating systemic risk’.
The Treasurer is also urged to address the issue of franking credits. Despite paying the same company tax rate as the major banks, the owners of customer owned financial institutions are not able to benefit from the tax "credits" offered to the owners of the big banks.
As the big banks pay dividends, their owners (shareholders) are able to benefit from the tax paid by the company through franking credits. This reduces the shareholders personal tax. The owners of customer-owned banking organisations don’t get the same benefit because they don’t receive “dividends”.
The unfair company tax burden can be solved by allowing customer-owned organisations to issue a frankable deposit product or by applying company tax on customer-owned banking organisations at a rate that is comparable to the effective tax rate of the major banks.
Deposits are the safest and simplest savings product, yet bear the heaviest tax burden. As many self funded retirees and pensioners can attest, in the current low interest rate environment real interest rates are negative. A capped 50 per cent discount on tax paid on deposits is a sensible measure. It has additional benefits, including providing a larger pool of stable funding for the banking system and promoting competition in banking.
If no action is taken, the major banks will continue to get bigger and increase their already dominant market share. Customer owned financial institutions aren’t asking for special handouts. They are already competing effectively against the major banks, but can compete even harder to benefit local people if they don’t have one hand tied behind their back.
Don Magin is the CEO of the Greater Building Society and chairman of the
Customer Owned Banking Association (COBA).