Abstract

Being concerned about the impact the banking system can have on the economy, every government takes special effort to protect and utilize the banking system towards the growth of the economy. Many countries have formulated special set of instructions, rule and regulations for the operation of the banking system in its economy and from establishment to operations, the system is closely monitored. Also, the central banks or the federal reserves of the economy are very vigilant about the activities of the banking system to ensure the smooth flow of the economy without any interruptions in terms of destruction of public trust or unexpected downfalls.

In this report, an impact of a decision made by the national government of Australia in terms of a special levy on the banking system is discussed in detail.

Introduction

Banks, being one important factor in the entire financial system of any country, play a vital and important role in determining the direction as well as the healthiness of the economy. Being the largest handler of the public funds in the economy, banks tend to be and considered to be the most sensitive institute to the public as any small failure, no matter how small, can lead to the breakdown of the entire financial system in the economy. Probably holding highest market capitalization together as a sector in the stock Exchanges of almost every country in the world, banking system in an economy can exert the highest possible impact on the economy in terms of any growth or decline. The allocation of the majority of the funds in the economy is determined by the efficiency of the banking system and therefore the profitability or the loss making of the economy as a whole is highly dependent on the banking system.

Due to importance of the performance of banks on the entire economy, many scholars have conducted their researches in relation to the banks. For instance, Reaz and Arun (2006) investigated the banking sector in Bangladesh while the practices of Islamic banks were examined by Ghayad (2008). In addition, the relationship between efficiency and Saudi banks’ performance was investigated by Al-Hussein and Johnson (2009) and the banking practices and codes of HDFC bank in India by Swan (2009). Also, Mullineux (2006), Imen (2007) and Huang (2010) have contributed to the studies in banking sector.

Being a sector that profoundly involves in handling the funds of other people, this sector’s response to the policies of the government and its impact on the performance of the banking system as well as the entire economy is a must-be-investigated point. Therefore, in this paper, it is endeavored to investigate the impact the decision of the government of imposing the new levy would exert on the Australian banking system.

Analysis

Why the Federal Government introduced the levy

The Australian Federal Government has introduced their new budget for the next year in which they have promised excessive benefits to the general public. In order to finance the extra expenditure of those excessive benefits, the government has to find out a newer way; probably a taxing scheme. The option the government has opted for is the imposition of a new levy on the banking system and this is about to affect the banks whose liabilities exceed the threshold of $100 billion and the applicable tax rate will be 0.015 per cent  quarterly and thereby a 0.06 per cent per annum.

Possible issues faced by the Federal Government and the banks

The issues faced can be determined in two perspectives; from the federal government and the banks.

Federal Government

The major issue faced by the government is the financing of the budget proposals it submitted. Once the budget is approved by the parliament, the government cannot ignore the pledges it made to the public. It is not clear the motive of the government in introducing the excessive benefits but it could probably be to enhance image of the government among the public.

So, to opening up a path to finance the expenditure was the issue faced by government.

Banks

As per the estimates, the new levy is expected to raise a total amount of $1.5 billion to $1.6 billion every year, for four years and therefore $6.2 billion altogether in four years. This is expected to be borne by only four banks in the economy; Commonwealth Bank, National Australia Bank, Westpac and ANZ and also Australia’s fifth biggest lender, Macquarie as they are the ones to exceed the applicable threshold for the levy. The issue for the banks is that this much of amount is definitely to affect the daily operations and investments of the banks in a negative manner.

Stakeholders affected by the levy

There are two stakeholders that are affected by this decision; customers and the shareholders.

Customers

The customers of the banks are mainly of two types; depositors and the borrowers. The banks are supposed to transfer the costs of new budget to these two types by either offering a lowered interest income to the depositors or increasing the interest rate for the borrowers or if applicable, both.

Shareholders

Shareholders expect a higher return for the funds they have invested. It is highly obvious that the bank is going to incur an opportunity cost; the lost revenue from the investment that could have been made if the funds used to pay the levy were invested somewhere else. As a result, the revenue of the bank is either lowered or staying still and therefore the shareholders are going to entitled to an decreased return or no return at all.

Related Accounting Theories

The scenario can be expressed in relation to two theories; Classical Political Economy Theory and Positive Accounting Theory (PAT).

Classical Political Economy Theory

Classical Political Economy Theory cconsiders the class interests, structural conflict, inequity and most importantly the role of the state. This theory depicts the means of maintaining the favoured position (e.g. wealth and power) of those who control scarce resources (capital) and as a means of undermining the position of those without scarce resources. The government is the one who controls scarce resources and it seems like the government endeavours to maintain the favoured position or the image among the public by using its existing power through a tax scheme, to finance the benefits to the public.

Positive Accounting Theory (PAT)

This is designed to explain and predict which firms will and which firms will not use a particular method but it says nothing as to which method a firm should use (Watts and Zimmerman, 1986).

  • Explain – Providing reasons for observed practice
  • Predict – Refers to theory predicting unobserved phenomena.

The assumption in this theory is that ‘all individuals’ action is driven by self-interest and individuals will act opportunistically to increase their wealth’.

This theory can be related to the behaviour of the banks in response to the newly introduced levy. It is expected for the banks to depict two behaviours in response; either to alter the balance between the interests paid to and charged from the depositors and borrowers respectively or to lower the return paid to shareholders. This describes the prediction of the Positive Accounting Theory of a certain action of an economic factor. In addition, it also describes the reasons for a certain action. In this action, all these actions take place to shift the additional cost incurred on the banks due to the new levy.

What the banks should do as a result of the budget announcement

It cannot be pinpointed what the banks should exactly do but one thing is certain that the banks have to pay the levy as it is imposed by the government. In all perspectives, the banks have three options as depicted above; offering a lowered interest income to the depositors or increasing the interest rate for the borrowers or lowering the earnings per share. It may depend on the decisions of the each respective bank after considering many aspects such as the impact on reputation, social circumstances etc.

Conclusion

Being one most prominent sector in the economy, Banking, Finance & Insurance companies’ performance profoundly affect the economy of the country. The financial health of the country is entirely depending on the well-being of this sector as the entire fund exchange of the country is handled by the components of this sector. Also the international fund inflows will hugely concern the strength of the financial institutions. In other words, the country will come to a standstill in economic operations if the performance of this sector is weakened. Therefore, the performance of this Banking, Finance & Insurance sector has much significance on almost every aspect of economy and among many of the factors that affect the performance of the companies, the nature, necessity and the extents of the expenses can definitely affect the performance of the sector to a certain extent. Therefore, when formulating taxes or any other regulation, it is always advisable for the government to consider this factor of how the banking system would react to it in order to secure the smooth flow of the economy.

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