Full transcript: Ken Henry’s interview with David Crowe

Here is an edited transcript of Ken Henry’s interview with The Australian’s political correspondent.

NAB Chairman and former Treasury Secretary Ken Henry. Picture: Hollie Adams

National Australia Bank chairman Ken Henry has demanded a full public inquiry into the federal government’s $6.2 billion bank levy, as he warns the shock tax will have to be passed on to customers to replace funds “confiscated” by Canberra.

Mr Henry spoke with The Australian’s political correspondent David Crowe on Monday. This is an edited transcript of his remarks.

Ken Henry: What surprised me about the levy was that when I was advising Howard and Costello on the GST we identified the whole set of particularly iniquitous taxes in the commonwealth that should be got rid of. This is in the 1998 document, A New Tax System, and top of the list of course was the wholesale sales tax. Next in line was financial institutions duty. Next in line was bank account debit tax. Next in line was a whole set of stamp duties applying to financial instruments.

And, you know, until this budget I had thought that these things were gone forever, that no future Australian government would go back to those sorts of taxes. That instead, if additional revenue had to be raised it would be raised from broad-based taxes so that the rate could be kept as low as possible in order to minimise distortions and in order to minimise the incentive for avoidance activity and unintended consequences.

“That is, I thought that by the time we had introduced the GST on 1 July 2000, the policy mentality that had given us the wholesale sales tax, financial institutions duty, bank accounts debits tax, all of the stamp duties on various financial instruments, a 32 per cent rate of tax on televisions and personal computers and so on — I thought that mentality was dead and buried. And it turns out it’s not.

It turns out the government has gone right back to the 1970s and the very early 1980s — that is, pre-Hawke — in designing tax policy. And I find that quite extraordinary.

The other thing I find quite extraordinary about it is the process. The banks have had two business days for consultation with Treasury on this tax and it’s clear from the consultations to date that the tax has been hurriedly put together. I must say I find it very difficult to believe that [the Australian Prudential Regulation Authority] was consulted on this tax before it was announced.

And the reason I find it difficult to believe is because the imposition of this tax cuts right across APRA’s desire to make the banks unquestionably strong — in the language of the government and APRA — by raising additional capital through retained earnings. APRA’s been on that mission. It hasn’t yet told us how much additional capital it wants us to raise through retained earnings but it has told us that it’s working toward a calculation and they’ve told us that it’s their expectation — this was before the budget — that we would be able to raise that additional capital through retained earnings.

The government has just walked straight into that and said ‘we’re going to have those retained earnings to fill a hole in our budget’ so I cannot believe the government consulted with APRA before making this announcement.

I reckon this tax, because it’s such bad tax policy, but also because of the way it intrudes into the proper regulation of the financial system, should be put before an open public inquiry. Maybe a parliamentary inquiry can do the job, I don’t know. There should be an open public inquiry because the tax lacks policy coherence both in respect of tax policy and in respect of financial system regulation.

The Australian: You say you find it difficult to believe APRA was consulted. Has anyone to your knowledge made any statement that APRA was consulted?

Ken Henry: Not to my knowledge. I haven’t seen anything that suggests they were consulted and I just find it so difficult to believe for the reasons that I’ve mentioned. APRA has been talking to the banks over the past several weeks now, prior to the budget, about its thinking in respect of ‘unquestionably strong’ and we had been led to believe by APRA, as I said, that whatever they announced would be an increase in capital that we would be comfortable financing out of retained earnings — that is through organic capital growth. This organic capital growth is now being confiscated by the government.

The Australian: One argument against you is that the bank levy is relatively small, it’s 5 per cent of the combined profits of the major banks and therefore it does not have such a big impact. What’s your response?

Ken Henry: My response is that relative to the additional amount of capital that APRA is looking at requiring us to hold it’s not small. It’s large relative to the additional capital that we expect — but APRA hasn’t told us how much additional capital they want us to hold. But it’s large relative to the additional capital that I would expect that APRA would be asking us to hold in order to be unquestionably strong.

The Australian: Does that mean it is half of what you would be expected to contribute over time, or one third?

Ken Henry: I don’t know exactly what it is that APRA is looking at but a figure of around about a third — I wouldn’t be surprised if it was in that order. The point there is that we’ve been asking ourselves, and all the banks would have been asking themselves, whether they would be able to generate this additional capital for APRA organically without putting up costs to customers. That’s a live question. That was a live question before the budget. It’s a much more serious question right now, I can tell you.

The Australian: Where else will you raise capital if you need to raise further capital to meet APRA’s objectives?

Ken Henry: We’d have to go to shareholders. If, given this levy, it can’t be done organically then the banks will have to go to shareholders. And what they’d be saying is ‘shareholders, you need to subscribe additional capital because we’ve got this tax bill to pay’. That’s what they’ll be saying.

The Australian: Would that require shareholders to forego dividends or would it be something much more direct and immediate?

Ken Henry: That would be a choice that would have to be taken and individual banks might respond in different ways. Of course, the alternative is to increase charges on customers.

The Australian: We have a poll in our newspaper today saying 68 per cent of voters approve of the bank levy and 71 per cent say you are not justified in passing that on to shareholders or customers. What is your response to those Australians?

Ken Henry: My response is the government should have acted more responsibly and explained on budget night that this tax will be borne by bank customers and or shareholders. It should not have pretended that there’s some magic pudding sitting somewhere that can generate additional funds at no cost to customers or shareholders. There is no such magic pudding and the government should have been more responsible in pointing that out to the public instead of misleading them in the way that they have.

The Australian: How much of that cost will have to be borne by shareholders and how much by customers?

Ken Henry: We’ll have to see.

The Australian: The levy would be $1.5 billion a year, so what share of that would be borne by NAB compared to other banks?

Ken Henry: We’re one of the big four and Macquarie’s banking business is quite small relative to the other four so you’d be safe in assuming that we’re more than a fifth and less than a quarter.

The Australian: If you’ve got 9.8 million customers, that’s personal and business, would it be a reasonably low cost per customer if you did pass it on?

Ken Henry: Whether it’s low or high is for the customers to judge but make no mistake — all of the banks will seek to pass it on to their customers in the environment that we’re in where the capacity to ask shareholders to absorb more, given what APRA’s trying to do, is severely limited. So I would expect that most will be shifted on to customers in one way or another.

Exactly how it’s done, and which type of customers will end up paying the lion’s share of this levy, I don’t know, but it won’t be a certain number of dollars per customer spread out across 9.8 million customers. That’s not how any increase in customer charges plays out.

The Australian: What about the argument that this is being applied on the institutional side of the bank and should not be passed on to retail customers at all?

Ken Henry: Well that’s just not right — the liabilities on our balance sheet are used to fund all of our operations. That’s not just institutional but retail as well.

The Australian: One of the arguments made for the levy is that the banks should be paying for the implied government guarantee under the Financial Claims Scheme? You get an implicit guarantee so isn’t it reasonable for the government to put a levy on the banks.

Ken Henry: My response is simple. If that’s the argument then APRA should come out today and say the banks do not need to raise any additional capital in order to satisfy the unquestionably strong requirement. That’s my response — so ask the chairman of APRA whether he has that view. Because if he has that view then we can simplify all of this. OK! The banks will pay this levy to the government and then APRA doesn’t need us to raise any more capital to satisfy their unquestionably strong requirement because the government’s looking after us.

I cannot believe that APRA and the government spoke about this before announcement because that argument that you’ve just put is the same argument that has been put in respect of the requirement to raise additional capital so that we’re seen as being unquestionably strong.

The Australian: So there was a debate about whether to charge for the Financial Claims Scheme in this discussion about being unquestionably strong?

Ken Henry: Yes, that has been in the public arena. One reason for justifying the unquestionably strong additional capital requirement is that we are seen as too big to fail, therefore there’s an implicit guarantee. That’s been the argument.

The Australian: So is the government trying to having it both ways?

Ken Henry: Yes — or to have it double funded.

The Australian: What about the argument that you pay a relatively low rate for the committed liquidity facility at the Reserve Bank and you should pay more — and this levy makes up for that?

Ken Henry: This levy is not going to make us more liquid. This levy is not going to enhance the liquidity of the banks and what we pay for the committed liquidity facility is very significant relative to the cost of it being provided.

One of the problems we’ve got here is that the system of financial sector supervision is now incoherent. This is a bigger issue, it goes beyond the budget. When the Wallis reforms, under the Howard government, were implemented, they made it clear that monetary policy was the responsibility of the Reserve Bank, the prudential regulation of the banks — that is to say depositor protection if you like — was the responsibility of APRA and conduct supervision is the responsibility of ASIC [the Australian Securities and Investments Commission]. And Wallis indicated that the RBA should have responsibility for both monetary policy and systemic stability.

Following the budget, and given other things that have been happening over the last several months, it now looks like APRA has responsibility for monetary policy, systemic stability and also for conduct. That’s what it looks like. And of course for prudential regulation as well with the RBA having responsibility for essentially economic monitoring.

Most of the monetary policy work that’s being done by the agencies in Australia today is actually being done by APRA. It’s not being done by the Reserve Bank — the Reserve Bank is not changing the cash rate but APRA is tightening up liquidity. And APRA, if you ask them why they’re doing it, they say it’s for systemic stability reasons despite the fact that systemic stability is actually the responsibility of the Reserve Bank, not APRA.

And they are now, in this budget, being given conduct responsibility instead of ASIC having that responsibility in the banking system. I think the whole thing is lacking coherence and at some point the government’s going to have to review all of those arrangements.

But right at the moment we’ve got the discussion about this levy being conflated by improperly formed views about the whole set of financial regulation, the whole set of arrangements that should apply to regulate the financial system.

The Australian: So what is view on stronger powers to claw back bonuses for executives? What is your response to that direct threat from the government?

Ken Henry: APRA used to have responsibility for prudential regulation. Today, they still have that but they’re being drawn into monetary policy, they’re being drawn into financial system stability and now in the budget they’ve been given a completely different role — which is not to supervise but to get into conduct which traditionally has been ASIC’s responsibility and not APRA’s responsibility.

And so my response to this is that the policy applied to the financial system is lacking coherence. It’s time that the government or even the parliament went back to basics here and asked themselves the question — which regulators do we need to do which pieces of work? This has been hurriedly put together without due regard to proper governance.

The Australian: But do you acknowledge there is strong feeling in the community that the banks are not being held accountable for their failures of poor treatment of customers and that more needs to be done to hold the banks to account?

Ken Henry: Obviously I do acknowledge that the banks have not always behaved in a way that the banks should have behaved — that there has not always been sufficient focus on the interests of the customers. Customers have not always been put first. Obviously I acknowledge that and I’ve spoken on it on a number of occasions over several years. But these arrangements that were announced in the budget don’t go anywhere near that. They don’t go anywhere near those issues.

The Australian: What about clawing back bonuses? The justification for clawing back bonuses is that the top executives will be responsible for what happens in their divisions. Is that a fair way to hold an executive to account?

Ken Henry: At NAB, the board does vary bonuses based on our assessment not only when financial performance metrics have been satisfied but also on whether conduct has been appropriate, whether behaviour has been appropriate. We exercise that discretion now.

These measures that were announced in the budget. It would be interesting — nobody would tell you — but it really would be interesting if you were to ask the Treasurer to name one senior executive of any bank who, had this system been in operation over the past five years, would not have got their bonus. See if he can name one person.

The Australian: You’re concerned about the levy on the banks but when you were at Treasury you advocated the mining tax. What’s the difference?

Ken Henry: There’s a world of difference. Australia would be in a better place today had the resources super profits tax, as first designed and as recommended in the review, actually been legislated. The cyclical performance of the Australian economy would have been much better than it’s turned out to be. Western Australia today would not be such a weak place had that tax applied.

The most important thing is this: the original design of that tax was that it was going to replace all of the state-based royalties. It was the same rationale that was used when the GST was introduced. This broad-based, low-rate tax was comprehensive so we could get rid of all the rubbish. That was the rationale. I don’t see any of that in this bank levy. Quite the opposite.

The Australian: There was always a debate about the mining tax hurting the economy. Will the bank levy hurt the economy?

Ken Henry: The mining tax would not have hurt the economy pretty clearly because we had the biggest mining investment boom the country’s ever seen and ever will see. The circumstances are very different now. This levy will be borne by customers right across the economy — retail customers and business customers — and there certainly will be an economic impact. No question.