WBC - Westpac

[Snoopy]

A bit more on this 'Financial Claims Scheme' they have in Australia

https://www.apra.gov.au/financial-cl...-policyholders

From the above link:

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How is the scheme funded?

If the Government activates the FCS, initial FCS funding will be provided by the Government in order to facilitate timely payments to account holders.

Amounts paid under the FCS and associated administration costs would then be recovered through the liquidation process through a priority claim. Any shortfalls through the liquidation would subsequently be recovered by the Government through an industry special levy.

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It does look like this levy is an 'after the event' procedure. If an Approved Deposit taking Institution was liquidated, then:

1/ Government pays out deposit holders. (Up to $250k under the one banking licence in trouble).
2/ Government liquidates the ADI to recover its money.
3/ Government imposes an industry levy to recover any shortfall.

So this FCS levy that might be applied to Westpac would be to pay out depositors from another industry player that has been liquidated. As Westpac shareholders, this is outside our control unless of course it is Westpac itself that end up in liquidation. But as Westpac shareholders, we will already be 'down the dunny' by that stage: no 'levy' to worry about!

What this exercise has taught me is that if you want to understand something it is best to look at Chapter 1 of the book first, not Chapter 3!

From AR2017 p4, the Chairman's report:

"The bank levy became effective from 1st July 2017."

So I was quite wrong to say it would be applied retrospectively after a crisis. It is being applied right now in advance of any prospective crisis!

Continuing from AR2017 p6

"The Bank levy is now in place but we must continue to agitate for its removal. It is a highly inefficient and distortive tax that places an impost on a small number of Australia's largest taxpayers (ANZ, Commonwealth, NAB, Macquarie and Westpac banks). It discriminates against Australian banks relative to global peers."

"The Financial Claims Scheme (ADIs) Levy Act 2008 provides for the implementation of a levy to fund the excess of certain APRA FCS costs connected to an ADI (Authorised Deposit taking Instituition) including payments by APRA to deposit holders in a failed ADI. The levy would be imposed on liabilities of eligible ADIs to their depositors and cannot be more than 0.5% of the amount of these liabilities."

The paragraph ends

"A contingent liability may exist in respect of any levy imposed under the Financial Claims Scheme."

This implies that this levy, despite being legislated for, has not been collected. But if the Federal Government wanted to collect this levy, how much would Westpac have to pay annually? If we take the amount of money in the Australian arm of the business from customer deposits as a guide, then I calculate an annual levy of up to:

0.5% x $464,254m = $2,321m per year

Yes that is right. $A2.3 billion each and every year as a levy (c.f. cash profit for FY2019 of $6.849billion) ! If ever there was a hidden sword of damocles hanging over the Westpac business model, this must be it. But will the Federal government ever implement a levy as draconian as this? And will such a levy in implemented be an annual charge or a one off.

I reiterate that this bank levy is being collected now. But it is not being levied on retail customer deposits, as I had assumed in my calculation above.

From

https://www.aph.gov.au/About_Parliam...ew201718/Banks

"The tax is expected to raise $6.2 billion over the forward estimates or around $1.5 billion annually" (A cumulative total from all five targeted banks).

That would indicate that, barring any ADI failure in the four years following 1st July 2017, the levy may cease to be applied after four years. But perhaps four years marks the end of the planning cycle, rather than the end of the tax? If this is the case, there is no signal that that the bank levy total will be capped

"There is no end date provided for the Bank Levy" (AR2018 p25)

The balance sheet for FY2019 may be found in AR2019 on p138.

Continuing to quote from the website referenced above (and adding my own AR2019 cross references):

"The tax will apply to:

1/ Corporate bonds [All fixed interest investments that Westpac have introduced to the market under their own name appear to be Tier 1 capital]: These are not applicable for the bank levy due to all Westpac (series 2,3,4,5,6 'capital notes') bonds being 'Tier 1' (see below *). However in the 'Balance Sheet' under 'Liabilities' under 'Debt Issues' there is other 'Senior Long Term Debt' listed: From AR2019 p198 Note 18, $109,340m (FY2019) and $103,159m (FY2018). The majority of Westpac 'Senior Long Term Debt' is held in foreign currencies, refer AR2019 p199 (c.f. same total figure on p198).

2/ Commercial paper [Includes Securitized Loans, Covered Bonds or 'Securitized mortgages with extra capital added' and 'Structured Notes' for example borrowings financed by energy savings from the purchase] $46,279m (FY2019), $43,171m (FY2018), from AR2019 p198 Note 18.

I think this category also includes 'Repurchase Agreements' of $10,604m (FY2019) and $9,522m (FY2018) AR2019 p197 Note 17.

3/ Certificates of deposit [Wholesale rather than personal term deposits], $38,731 (FY2019), $41,534m (FY2018) from AR2019 p195 Note 16, AND

4/ Tier 2 capital instruments. ( $12,502m (FY2019), $8,310m (FY2018) from AR2019 p200 Note 19)

(*) It will not apply to

1/ Additional Tier 1 capital and
2/ Customer deposits protected by the Financial Claims Scheme (FCS)."

"A tax of 0.06 per cent will be applied to the liabilities of banks meeting certain size criteria"

While the parent legislation allows for a levy of up to 0.5% of certain deposits, the reality is that the sum charged is 'only' 0.06%. That sounds like the banks have got away lightly. But we are talking about a sum close to $100m per year nevertheless. And the levy is due 'every year'. So to answer my own question, the levy is not a one off. But the amount collected is not as draconian as the underlying legislation allows (just over 1/10th of the maximum in fact).

SNOOPY