The cost of the Federal Government guarantee of Australia’s commercial banks


The too-big-to-fail (TBTF) status of Australia’s major banks creates an implicit Federal Government guarantee of the non-deposit liabilities of those banks, as noted in the interim report of the Murray Financial System Inquiry (FSI). The FSI also questions the adequacy of the capital held by the major banks, and whether Australia’s banks should not have capital adequacy ratios that are high by global standards, rather than ‘middle of the pack’. Moving to a high ranking in capital adeqyacy, amongst comparable banking systems, would require Australia’s major banks to hold 2-3% more capital as a fraction of risk weighted assets.

These two observations – about the TBTF guarantee and capital adequacy  – are closely related. Extra capital requirements would substantially reduce the value of the implicit guarantee of non-deposit liabilities of banks which is provided free of charge by the Federal Government. This study seeks to quantify the reduction in the cost to the Federal Government of providing the TBTF guarantee that would result from an increase of 2 or 3% in the capital adequacy requirement of Australia’s major banks.

It has been suggested in several forums that the stakeholders of banks should be made to pay for the implicit TBTF guarantee, with an assets tax or liabilities tax. Those suggestions (which are not endorsed in this paper) also raise the question of how much the TBTF implicit guarantee is currently costing taxpayers.

Download The cost of the Federal Government guarantee of Australia’s commercial banks

This paper was presented in July 2014 at the 19th Melbourne Money and Finance Conference (MMFC), which explored the theme Current Issues in Australian Financial Markets.

For more papers presented in the conference, please click here