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http://www.theaustralian.com.au/business/financial-services/big-four-banks-reaping-4bn-subsidy-says-central-bank/news-story/318eaaf71c7ddce13b96ad121d55a26c

Big four banks reaping $4bn subsidy, says RBA

·      THE AUSTRALIAN

·      MAY 26, 2016 12:00AM

·         Adam Creighton

Economics correspondent

Michael Bennet

Reporter

Sydney

https://plus.google.com/104696130655346828921

The big four banks are enjoying an implicit taxpayer subsidy worth ­almost $4 billion because their creditors know they will be bailed out in a crisis, new Reserve Bank research shows.

In the first valuation of the subsidy by an Australian regulatory body, documents released by the RBA yesterday show that in 2013 the “total subsidy” to ANZ, Westpac, National Australia Bank and Commonwealth Bank was ­between $1.9bn and $3.75bn.

The four major banks posted a combined profit of $26.2bn.

“The credit ratings of Australian banks do benefit to some ­extent from rating agencies’ perceptions that the government would support them if they got into trouble,” the documents, released under Freedom of Information laws, say.

“The major banks and Macquarie receive a two-notch credit rating uplift from S&P as a result of the rating ­agency’s expectation that these banks will receive ­support from the government in a crisis.”

Saul Eslake, former chief economist of ANZ, said implicit guarantees encouraged owners and especially managers of banks to take greater risks than they otherwise would, while creditors would lend to them at cheaper rates.

“The implicit guarantee generates economic rents that are carved up mainly between shareholders via large profits, senior ­executives through high remuneration and customers through lower interest rates,” he said.

The RBA study showed big banks had been able to issue bonds at interest rates between 0.4 percentage points and 0.8 percentage points below those of their smaller competitors since the ­global financial crisis, which equates to billions a year in extra profit.

Mark Degotardi, the chief of the credit union lobby group, the Customer Owned Banking ­Association, said the RBA figures “provide more evidence that ­further ­reforms are needed” to ­increase competition.

The Australian Prudential Reg­u­lation Authority should speed up efforts to ensure the big banks had adequate capital to deal with ­another global crisis, which would in turn benefit smaller lenders ­subject to stricter “risk-weighting” rules that limited leverage and thus profitability, he said.

In its submission to the Financial System Inquiry, the Commonwealth Bank, the nation’s biggest, denied there was any subsidy to the major banks.

The RBA’s results support previous studies that have argued the big banks benefit from a large subsidy, valued by regional banks at between $5.9bn and $7.9bn.

Credit unions and regionals, such as Bendigo and Adelaide Bank and Suncorp, have lobbied the government to prevent the guarantee distorting the market.

The International Monetary Fund estimated the subsidy for the major banks to be 80 basis points before the GFC, rising to 120 basis points in 2009 and providing a “relative funding advantage”.

In the wake of the FSI, the ­government has tasked APRA with making the major banks ­“unquestionably strong”, which could reduce the value of their ­implicit guarantee. The analysis comes amid international efforts to make large banks lower their leverage levels to help remove the “too big to fail” subsidy.