Deposit insurance premiums need to be risk-based

The Financial Claims Scheme "is not properly priced", and the "too big to fail" perception is distorting the financial system, federal Treasury said in its submission to the Financial System Inquiry.
    
More broadly, Treasury called for "ameliorating the impact of guarantees to the banking sector that have introduced or reinforced distortions that generate moral hazard and that preference some banks over others to the detriment of competition and the efficiency of the banking sector."

The FCS "potentially distorts the Australian financial system by reducing depositors' incentive to monitor bank performance and encouraging individuals to invest in deposits over other assets such as retail corporate bonds," Treasury observed.

"In practice though, the FCS is likely to reinforce rather than alter depositor's behaviour as depositors already acted as though the FCS was in place prior to its introduction."

Treasury said that "a risk-based approach could be used" in place of the flat premium of five basis points now planned.

"Under a risk-based approach, the rate of the levy would vary between banks depending on an assessment of their riskiness."

It said this "could potentially address the moral hazard concerns associated with the FCS and discourage excessive risk-taking."

In a nod to the grumbles of small banks, Treasury said "another option to address the issue of 'too big to fail' is to price the implicit guarantee through the imposition of a tax on the major banks."

"This would reduce their funding cost advantage over their competitors."