Government scraps bank deposit levy

The Government has dropped plans to introduce a deposit levy to fund the Financial Claims Scheme, in line with a recommendation of the Financial System Inquiry.

Prime Minister Tony Abbott said in a statement that the levy would have imposed costs of A$1.5 billion on depositors and would have damaged competition in the industry by putting regional and community banks at a disadvantage relative to the big banks.

The levy was announced by the previous Government in a pre-election economic statement in August 2013. Labor's plan was to establish a Financial Stability Fund to meet any costs of the Financial Claims Scheme.

The fund was to have been be supported by a 0.5 per cent tax on protected deposits, with the arrangement scheduled to start in 2016.

The Financial System Inquiry recommended that the Government retain the current funding model for the Financial Claims Scheme, where payouts to depositors are recovered by liquidating a failed bank and, if the proceeds from that are insufficient, applying an ad hoc levy on the industry.

The FSI's view was that the Financial Claims Scheme was a "fundamental component in protecting depositors", providing a guarantee of up to $250,000 per account holder per financial institution.

Several bodies, including the International Monetary Fund and the Council of Financial Regulators, were in favour of an "ex ante" funding model along the lines proposed by the Labor Government.

The FSI said the levy model had some appealing features: it was based on user pays principles; it would enable levy funds to be deployed for wider ADI resolution purposes; and it offered the potential of a fiscal buffer.

However, the FSI said it preferred an arrangement where a levy would only be imposed if the Financial Claims Scheme were triggered and the liquidation process did not raise enough funds to meet claims.

"Because Australia's depositor preference arrangements reduce the risk of an ADI's assets being insufficient to meet insured deposits the case for an ongoing levy is less justified," the FSI report said.

The FSI also said some of its other recommendations, such as those calling for higher levels of bank capital, would further strengthen the resilience of the banking sector and mitigate the cost of failures.

Responses to the Government announcement from industry bodies and individual financial institutions have all been supportive.