This article was written by David Wood, Ian Paterson and Frankie Barbour.
The Major Bank Levy (Levy) has been rapidly brought before Parliament, only 3 weeks after it was announced as part of the 2017-18 Federal Budget and just over 1 week after the affected banks were asked to make submissions. The Levy is intended to impose a 0.06% per annum levy on the major Australian banks from 1 July 2017, calculated based on their liabilities and payable quarterly. Its purpose is ostensibly twofold: to contribute to “budget repair” and to level the playing field with smaller banks.
The Levy is to be enacted under two pieces of legislation: the Major Bank Levy Bill 2017 (Bank Levy Bill) and the Treasury Laws Amendment (Major Bank Levy) Bill 2017 (Amending Bill). The Bank Levy Bill sets out the mechanisms for determining the amount of the Levy, while the Amending Bill introduces reporting requirements and new specific anti-avoidance provisions, along with other consequential amendments flowing through various Acts.
Who is impacted by the Levy?
The Levy is imposed on Authorised Deposit-taking Institutions (ADIs) whose “total liabilities amount” for a quarter exceeds AU$100 billion, indexed quarterly in line with GDP. The total liabilities amount is the sum of the total liabilities of the ADI for a quarter, determined in accordance with an “applicable reporting standard” to be produced by APRA. That standard has not yet been made public.
While this is intended to catch only the five major Australian banks, foreign banks which operate in Australia may also be ADIs. It may be the case that the “total liabilities amount” in the applicable reporting standard will be limited to a foreign bank’s Australian liabilities, which would likely result in all foreign banks coming under the threshold.
Imposition of the Levy
The Levy is imposed on the “applicable liabilities amount”, which is calculated as the difference between the total liabilities amount and the sum of certain other amounts which are exempt from the Levy, being:
- Additional Tier 1 Capital;
- deposits protected by the financial claims scheme;
- the lesser of derivative assets and derivative liabilities for the quarter;
- the exchange settlement account balance held with the RBA; and
- other amounts as determined by the Minister.
These amounts refer again to the as-yet undisclosed applicable reporting standard, making it difficult to meaningfully assess the impact of the Levy.
Much concern has been raised around what is included (and not included) in the list of exempt amounts and its distortionary and arguably arbitrary effect.
For example, there is no exemption for the amount of high quality liquid assets (HQLAs), despite these assets being required to be held to meet APRA liquidity. Since holdings of HQLAs need to be funded, the levy and the lack of an exemption creates an incentive for ADIs to reduce the amount held. Further, it appears derivative positions will be valued on an accounting basis, which will not fully recognise the effect of collateral which would reduce the ADI’s true exposure. There is also no exclusion of non-funding liabilities like provisions for employee costs – and even provisions for the Levy itself.
The new anti-avoidance provisions in Division 117 draw heavily on Part IVA, empowering the Commissioner to negate an “MBL benefit” where person entered into a scheme with the sole or dominant purpose of obtaining that MBL benefit. This is applied to schemes entered into at or after the Budget speech was made on 9 May 2017.
The lack of an exclusion for genuine commercial transactions undertaken as part of the ADI’s balance sheet, capital and liquidity management activities is a source of concern, since this may impact ADIs’ capacities to manage their funding sources quickly and effectively.