Bank stability charge 'the only rational response'

Australia's banks must make a much larger financial contribution to their own stability, according to University of NSW finance law expert Professor Ross Buckley.

Speaking to Stephen Long on the ABC's PM program last night, Professor Buckley argued that Australia had made "some fairly fundamental changes" to the financial system as a result of the global financial crisis, including the takeovers of St George and BankWest. One result of this, he said, was that none of the Big Four banks could now be allowed to fail.

As a result, Professor Buckley said, the banks should be asked to contribute to a bail-out fund "to ensure their long-term stability".

Britain late last year introduced a levy on bank liabilities to finance such a fund. And a Treasury report last October agreed "it can be argued that there is a strong case for charging the banking sector for the implied systemic guarantee provided by the public sector".

"Why should the banking industry have its liabilities guaranteed by government when no other industry has that benefit?" Buckley asked.

Professor Buckley also warned that the protection now provided to banks meant they would become less risk-averse and "we should expect them to take more risks".

"The only rational response to this is to get the banks to make a much larger financial contribution to their own stability," he said.

Banking Day believes that it has been a long-standing - though not formally stated - policy of APRA and the RBA that any of the Big Four would be prevented from failing outright. Shareholders could lose all or almost all of their capital, but obligations to creditors would be met and the bank would continue as a business.