New levy on bank deposits

As if term deposit holders needed another excuse to look elsewhere for better investments, the federal government is reported to be considering a deposit insurance levy on banks.

According to the Australian Financial Review (AFR), The government’s economic statement, set to be released on Friday, will contain a levy on deposits which will raise funds to bail out any bank should it need assistance in future.

The government currently guarantees deposits up to $250,000 at no cost to the banks. Beyond that, there is no insurance for deposit holders. The AFR says the levy would build up funds over time, taking a number of years to reach the billions. The revenue raised will also be added to the budget, to offset a forecast plunge in revenues.

The banks are understood to be unhappy about the proposal, as are investors, sending the share prices of the big four of ANZ Bank (ASX:ANZ), Commonwealth Bank (ASX:CBA), Westpac Banking Corporation (ASX:WBC) and National Australia Bank (ASX:NAB) plunging. While prices have recovered somewhat, the banks are dragging the market lower.

But it’s deposit holders who are most likely to wear the pain, in the form of lower interest payments. It could also see a stampede to the exits by deposit holders, seeking better returns in the stock market, property or other asset classes. With banks using deposits to fund around 60% of their lending, they could again be forced to rely in international credit markets to secure lending, potentially putting them at risk, should those markets close as they did during the Global Financial Crisis.

Foolish takeaway

For those investors who have been buying into the big banks for the yield, and on the basis that our banks appear ‘risk free’, this is a stark reminder that banks are highly leveraged businesses and are not risk-free.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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