Kevin Davis: the cost of this morning’s Metro rail debacle is $12 million

Posted on July 27, 2010
Filed Under General News, Media Watch | Leave a Comment

Published in The Age, 27 July at 3:21 PM by Megan Levy and Clay Lucas

The Australian Centre for Financial Studies’ Research Director, Kevin Davis estimates that this morning’s rail meltdown may have cost Victoria’s economy at least $12 million in lost productivity. Over 400,000 train commuters were affected by the outage and delays of more than an hour on 15 of the city’s 16 train lines during peak hour.

How did Kevin come up with these figures? Read more

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Taxing the Banks

Posted on July 23, 2010
Filed Under Banking, Financial Institutions and Markets, Financial Regulation Discussion Paper Series, Policy | Leave a Comment

FRDP 2010-01 
July 12, 2010

In the wake of the Global Financial Crisis, there is widespread international consideration of proposals to impose specific taxes (levies) on banks (and some other financial institutions). The UK has already done so in the budget of 22 June 2010 and the French and German Governments have also announced their intentions to impose some form of bank balance sheet levy.

While some see such an impost as an ex post charge for the costs incurred by governments and national economies for excessive risk taking by banks which led to the GFC, most support is based on a forward looking view. Thus the IMF argues that “[e]ven countries that provided little or no support to their financial sectors during the recent crisis should consider forward-looking contribution schemes.”(1)

But there is not unanimous support for such an approach, as reflected in the recent communiqué of the G20 leaders Toronto Summit declaration.

“We agreed the financial sector should make a fair and substantial contribution towards paying for any burdens associated with government interventions, where they occur, to repair the financial system or fund resolution, and reduce risks from the financial system. We recognized that there are a range of policy approaches to this end. Some countries are pursuing a financial levy. Other countries are pursuing different approaches.” (2)

This reflects the fact that other strategies such as increased risk-based capital requirements are an alternative to taxation of banks in terms of their potential effects on risk-taking. There is also relatively little evidence on what effects such taxes would have, and how best to structure them.

The UK levy (to operate from January 2011) is to be set at an initial rate of 0.04 per cent, eventually rising to 0.07 per cent, of a bank’s aggregate liabilities excluding tier 1 capital (equity), insured retail deposits, repo funding backed by sovereign debt, and any retail insurance policy liabilities. There is also a reduced levy rate for long-term wholesale liabilities, reflecting the intention of the levy to encourage adoption of funding arrangements less exposed to instability. In this regard, it would have interactive effects with Basel II proposals for a Net Stable Funding Ratio requirement.

In the US, proposals for a levy funded Systemic Dissolution Fund as part of the Dodd-Franks Wall Street Reform and Consumer Protection Act were dropped in late June compromise negotiations in favour of expanded resolution powers for the FDIC, although President Obama apparently favours a “bank tax”.

There is no apparent Australian Government support for any introduction of a bank-specific tax, with much rhetoric flowing from the industry about Australian banks not having needed Government support – with this weakening arguments for any imposition. And given the recent experiences with minerals taxation, the Government is unlikely to want to rush into any other tax proposal specific to a major industry such as banking.

But there are at least three reasons why this matter should be seriously examined in Australia.

One can be found in the IMF quote referenced above – such taxes have a forward looking basis. They aim to induce behaviour less likely to create systemic crises and also partially internalize the externalities created by systemically important banks in this regard. Financial and economic theory is struggling to catch up and adequately explain the evidence of abundant financial instability we have seen over the years, but the conventional wisdom now seems to be that banking and financial systems are exposed to instability and systemically important banks play a major role in creating that exposure.

A second reason is that it is simply not true to say that Australian banks were not subject to substantial government support during the GFC. An initial blanket guarantee of bank liabilities, was followed by the wholesale funding guarantee scheme. And while the latter involved guarantee fees, those fees were substantially lower than those charged by other governments and even further below the risk premium assessed and required by the financial markets at the time. Yes, the Australian government received a fee for taking on risk, but the fee was well below what could have been charged (and alternative funding costs faced by the banks) and in that way was a subsidy to banks and their shareholders.

Third, it is now accepted that “Too Big To Fail” is the modus operandi of governments and financial regulators when dealing with systemically important financial institutions. While that does not include all banks in Australia, it is hard to escape the conclusion that TBTF operates for at least the four majors. The IMF has estimated the net effect of the TBTF policy as a subsidy of funding costs for such institutions in the order of 20 basis points.(3) A tax of equivalent magnitude would thus seem justifiable – in the form of a “user-pays” charge.

The preceding arguments do not necessarily imply that a “big bank tax” is appropriate for Australia. It may be that financial stability concerns can be adequately addressed through other regulatory initiatives (such as capital adequacy requirements). But they do suggest that such proposals should not be dismissed out of hand, and warrant further investigation (including of likely consequences). At the very least, if such levies/taxes become widespread internationally (as appears likely) justification of their non-imposition will require Australia to be able to demonstrate, in the spirit of international collaboration and fairness, that there are sound reasons for not doing so.

(1)http://www.imf.org/external/np/g20/pdf/062710b.pdf

(2)http://www.g20.org/Documents/g20_declaration_en.pdf

(3)http://www.imf.org/external/np/g20/pdf/062710b.pdf

This FRDP was prepared by Kevin Davis, Professor of Finance, University of Melbourne, and Research Director, Australian Centre for Financial Studies.
kevin.davis@australiancentre.com.au

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Australian Centre for Financial Studies to lead bid for Centre for International Finance and Regulation

Posted on July 9, 2010
Filed Under ACFS Governance, General News, Media Release | 1 Comment

At its official launch event this week, Australian Centre for Financial Studies announced that it is putting together a consortium to make a highly competitive bid for the Centre for International Finance and Regulation announced in the May Federal Budget.

At the ACFS event – also addressed by Chris Bowen Federal Minister for Financial Services Superannuation of Corporate Law – Victorian Treasurer and Minister for Financial Services John Lenders welcomed the initiative and announced Victorian Government support for the bid. RMIT University’s respected Melbourne APEC Finance Centre which has a strong track record of training financial regulators and executives across the region is a key member of the bid.

ACFS Director Professor Deborah Ralston stated that Australia has a deserved reputation for firm but flexible regulation. “Our twin peaks structure for prudential oversight and market supervision is rightly lauded.” So “Australia does not want to unnecessarily change a system that is working comparatively well. Our challenge is to continue punching above our weight in the key international forums that shape regulatory developments. An academic research agenda informed by involving key industry participants is required.”

“A new ACFS bringing together a range of industry and academic partners is well positioned to deliver education and training for financial regulators and executives across Australia and the Asia Pacific region.”

About the Australian Centre for Financial Studies

The Australian Centre for Financial Studies facilitates industry-relevant and rigorous research and consulting, thought leadership and independent commentary. Drawing on expertise from academia, industry and government, the Centre promotes excellence in financial services. The Centre specialises in leading edge finance and investment research, aiming to boost the global credentials of Australia’s finance industry; bridging the gap between research and industry and supporting Australia and Melbourne as an international centre for finance practice, research and education.

The Centre provides access to and links between academics, finance practitioners and government and draws on expertise and experience from across these groups, to facilitate and disseminate knowledge creation and transfer throughout the greater finance community via its various activities.

The Australian Centre for Financial Studies (previously known as the Melbourne Centre for Financial Studies) is a not-for-profit consortium of Monash University, the University of Melbourne, RMIT University and Finsia having commenced in 2005 with seed funding from the Victorian Government.

Media contact:
Professor Deborah Ralston
Director, Australian Centre for Financial Studies
(+61 3) 9666 1010
(+61 0) 419 650 318

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Australian Centre for Financial Studies Launch

Posted on July 6, 2010
Filed Under ACFS Governance, Event News, General News, Media Release, Sponsorship Support | Leave a Comment

On Wednesday 7th July 2010 the Hon. Chris Bowen together with John Lenders MP and Professor Deborah Ralston, Director of the Melbourne Centre for Financial Studies, will launch the Australian Centre for Financial Studies. With the full support of the Centres’ new Corporate Sponsors GOLD – ANZ Trustees and KPMG; SILVER – PricewaterhouseCoopers and CORPORATE SUPPORTER KordaMentha; the Melbourne Centre for Financial Studies will become the Australian Centre for Financial Studies (ACFS).

Since the inception of the Melbourne Centre for Financial Studies (MCFS) in 2005, with seed funding from the Victorian Government and support from it’s consortium members, Monash, RMIT and Melbourne Universities and Finsia, more than A$2million additional revenue has been sourced with over A$1.5million in research grants distributed to finance academics whom have undertaken in excess of 60 research projects.

In October 2009 in conjunction with Mercer and DIIRD the MCFS released the first Melbourne Mercer Global Pension Index, and in February 2010 for the first time, they managed and delivered the Melbourne Financial Services Symposium. The MCFS has and continues to take a keen interest in public policy and regulatory issues, and has conducted numerous Conferences and symposia on financial regulation, superannuation governance Islamic financial services and Australia’s role as a financial centre for the Asia Pacific.

Professor Ralston said that “at this stage we needed to extend our role by highlighting the strength of the Australian financial services sector and the complimentary attributes of financial sectors in Sydney and Melbourne, to assist Australia’s development as a global financial hub. Increasing our capacity to undertake contracted research and consulting projects in-house, especially in areas that inform the public interest, further expand the university network to universities outside of the initial consortium in Victoria and other states to draw on a wider academic resource and, finally, attract the commitment of larger nationally based sponsors to pursue broader industry partnerships with nationally based organisations establishing links with similar centres internationally.”

Professor Ralston added that “Drawing on expertise from academia, industry and government, the Centre promotes excellence in financial services. The Centre provides access to and links between academics, finance practitioners and government and draws on expertise and experience from across these groups, to facilitate and disseminate knowledge creation and transfer throughout the greater finance community via its various activities.”

Media contact:
Professor Deborah Ralston
Director, Australian Centre for Financial Studies
(+61 3) 9666 1010
(+61 0) 419 650 318

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