Analysis: Time for APRA to disclose risk ratings

If a deposit insurance levy is a form of insurance premium - which it is - those applying the levy need a clear rationale for its level, including any differences in the level of the premium charged to different institutions.

For now, the Federal Government plans a flat levy on all bank deposits of five basis points.

Arguments are already underway about the case for different levies for entities of different size and risks.

The Customer Owned Banking Association, for instance, said on Friday that the levy "should target the four major banks rather than depositors."

COBA argued that "for a levy to be fair it must address the implicit guarantee enjoyed by the Big Four", citing analysis by the International Monetary Fund, from 2012, to support this view.

The Greens, whose Senate votes may matter if Labor should be re-elected, are taking a similar view, while insisting on portraying the proposed levy as a form of profit tax (a separate policy option they advocate).

Charging no levy to the smaller (and often most risky) banks would be a pretty strange choice. The deposit levy, as a form of insurance, needs to be linked to an assessment of risk.

One is readily available, to regulators, in the form of the rating the Australian Prudential Regulation Authority uses to determine a minimum capital target for each bank.

This is often much more than a notional floor of eight per cent of risk-weighted assets and additional capital buffers.

No bank discloses the actual capital target imposed on it by APRA, and nor does APRA allow banks to do so.

It is only when a bank or ADI has its back to the wall that this target slips into public view.

If a system of risk rating banks for deposit insurance were to be adopted, this may be the system to use - as long as it's in full view.