‘Tax big banks’ for guarantee

ME Bank chief executive Jamie McPhee has called on the government to level the competitive landscape for small lenders.

ME Bank chief Jamie McPhee. Picture: Aaron Francis

ME Bank chief executive Jamie McPhee has called on the government to level the competitive landscape for small lenders by taxing the major banks for the cheaper funding they get on the wholesale market due to investor belief the companies would be rescued by the government in a crisis.

Speaking to The Australian as the fledgling bank reported an 11 per cent slide in net profit to $41 million for the second half of last year, Mr McPhee said there were three key areas for reform to break the big four stranglehold on the local banking market.

“We’re not asking for a handout. We’re asking to compete fairly. That it’s in the best interest of the consumer,” Mr McPhee said.

Due to the implicit government guarantee enjoyed by Commonwealth Bank, Westpac, ANZ and National Australia Bank, as they are considered too large to be allowed to collapse, investors charge less for funding the banks than for smaller lenders that aren’t considered too big to fail.

This gives the big banks access to wholesale funding about 20 basis points cheaper.

“The ratings agencies are giving a three-notch ratings uplift to the major banks,” Mr McPhee said.

“That implicit guarantee is being provided by the taxpayer. The appropriate body, whether it is the Reserve Bank or Treasury, should do that calculation and the banks should pay that back to the rightful owner, which is the taxpayer. It should become part of the annual budget cycle,” he said.

The government in 2017 established the major bank levy, at a rate of six basis points on bank assets, which is expected to raise over $6 billion over four years. The Greens have proposed extending this to 20 basis points to account for the benefit received by the major banks. Labor could be under pressure to tinker with the rate if it fails to pass its contentious negative-gearing, capital gains tax and franking credit policies, in order to fund its election promises.

“Let’s just calculate the benefit and return it to the taxpayer who ultimately is providing that ratings uplift,” Mr McPhee said.

ME Bank’s profit slid over the year largely due to investing in new projects and overhauling its IT system. On an underlying basis, profit rose 8 per cent to $55m.

The bank, which is owned by a suite of union-and-employer-backed industry superannuation funds, now controls 1.49 per cent of the home loan market, up from 1.46 a year ago. Household deposits grew 23 per cent to $11bn.

Along with ending the major banks’ funding advantage, Mr McPhee said it was important to close the gap in capital requirements between large and smaller banks. Large banks are required to hold just 5 per cent of capital against a loan, compared with about 25 per cent for smaller banks. Mr McPhee also urged the Productivity Commission to be tasked with ensuring that any new regulations on the banking sector were implemented in a way that did not disadvantage smaller banks.

“At the end of the day, the best anecdote for the things coming out of the royal commission is more competition. You have to be careful about how that regulation is applied so it doesn’t skew competition,” he said.

Mr McPhee said ME Bank was “very close” to being able to pay a dividend to its shareholders — industry funds.

There has been an increase in scrutiny of the investment decisions made by the industry fund sector, after Treasurer Josh Frydenberg intervened in a dispute between big business and the industry funds over perceived investor activism.

Mr McPhee said ME Bank had an independent board without any representation from shareholders.

“The responsibility of the bank is to build a bank that provides shareholders with a reasonable rate of return not an optimal return because we want to deliver against our core purpose of helping all Australians get ahead.”