It is traditional in the lead up to the Commonwealth Budget to speculate on new, increased or reduced taxes, sometimes in the faint hope of being able to manage your affairs in anticipation of the change.

The Treasurer has given interviews indicating his preference to proceed with the introduction of a Financial Stability Fund from 1 January, 2016 as proposed by the previous Government.

As previously proposed, the Fund would be funded by a levy set at 0.05 per cent on deposits in ADI’s (banks, credit unions and building societies) of up to $250,000.

It would be built gradually over time to a target size of 0.5 per cent of total deposits protected by the Financial Claims Scheme.

There has been no mention of whether a levy would be modified for regional banks and mutuals.

The imposition of a levy would be a rejection of a recommendation of the Financial System Inquiry Report that a levy only be imposed after a bank failure occurred.

The Report observed:

The proposed ex ante funding model has a number of appealing features, including:
• Being based on a user-pays principle.
• Enabling levy funds to be deployed to aid in wider ADI resolution purposes.
• Offering the potential to build a fiscal buffer.

However, an ex ante levy would be an ongoing cost for all ADIs. In contrast, the current ex post model only imposes a levy if the FCS is triggered and insufficient funds are recovered through liquidation to recoup the costs. 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 Inquiry notes that the recommendations in this chapter would further strengthen the resilience of the Australian banking sector by reducing the risk of failure and mitigating the costs of failures that do occur. If adopted, these recommendations weaken the case to charge an ex ante levy for the FCS.

The Inquiry notes that the consultation package outlined in Recommendation 5: Crisis management toolkit, includes a number of measures designed to strengthen the FCS and Government’s ability to recoup costs. These include an additional payment option that allows APRA to transfer deposits to a new institution using the funding available under the FCS.

On this basis, in the Inquiry’s view, it is preferable to retain an ex post funding model that avoids placing an ongoing financial burden on the industry.

The 2015-2016 Budget will be announced on 12 May 2015.