Eco203 International Economics : Critically Assessment Answers

Answer:

Introduction:

The assignment is prepared by critically analysing and evaluating the given article that is “Budget 2017: The economic case for the bank levy”. Article has been analysed from the perspective of banks and it incorporates the possible course of actions taken by banks in lieu of levy imposed and announced in the budget. Furthermore, paper also demonstrate the effective implementation of IFRS 9 in year 2018. IFRS 9 of International Accounting standard board require banks to estimate the expected losses and recognition of impairment against w wider spectrum of assets. The business model laid down includes a model of measurement and categorization (Devereux, 2014). This also involves a transformed approach for hedge accounting and single model for impairment.

Discussion:

Some of the arguments made by entities were discussed in the article about the payment or costs that should be borne by parties to insurance. Failed bank bears the risk of making payment to depositors and the uninsured creditor of banks who bears the ultimate risks. Bank levy introduced by government at 0.06% taxes in the federal budget would fall less on shareholders as compared to customers (Levy, 2016). This has been ascertained by studies conducted by European countries. In addition to this, the overall risk of the banking system would be affected by the imposition of this specific levy. The critical component of plan of government is the industry-funding intended to improve the outcome of consumers in the financial system. Probability of failing of banks is minimized in event of compulsion on banks to incur levy. Nonetheless, this could results in persuasion of risky behaviour. Imposition of levy would minimize the after tax profit margin of bank and this would increase the probability of causing default. Some of the possible course of actions that can be taken by banks are discussed by involving the customers on whom levy can be passed.

Possible course of action by banks:

The impact of levy can be passed on by banks on customers by raising rate of fees and loans. Additional amount or expenditure will not be borne by shareholders as per the response of National Australian bank. This is so because levy is not only imposed on the banks itself and Australian residents will also have to bear the impact of tax imposed. The reason is attributable to the fact that Australian residents are directly or indirectly benefiting from Australian banking industry. It accounts for stakeholder of big banks such as customers, staff members, suppliers and shareholders owing to share of banks through superannuation (Eyal & Levy, 2013).

The vast majority of cash can go or absorbed into lower profits and higher prices of products. Levy cannot be identified as cause of specific change in the input pricing complexities. There can be employment of different funding techniques by banks such as transferring assets into securitization vehicles that are financed off balance sheet. Banks will not be confine to home mortgages and the products that are demand inelastic and strong would be considered by banks by taking into account their fees and products. Most of loans provided are broker originated and impacts will be across fees and range of margins. This will minimize the impact on dividends and profits. CEO of ANZ bank has said it to Australians shareholders association conference that it must be explained that levy is considered as tax on shareholders (Hao et al., 2016).

Bank risks a backfiring as majority of public supports the tax. After analysing the issue concerning levy, ACCC (Australian Competition and Consumer Commission) was asked by Australian government to demeanour an enquiry into the residential pricing. Changes made to the pricing and mortgage fees are described by banks when asked by ACCC. In recent times, there was initiation of levy in some part such as G20 nations including United Kingdom and the present bank levy is identical to taxes imposed. The intention of imposition of such levy is to stabilize the balance sheets of big banks and increase of revenue after the global financial crisis (Tongzon et al., 2015). It has been found that concentration of banking industry forms the basis of transferring the tax as per the evaluation and analysis of taxes on banks in thirteen European nations and United Kingdom. When the banking industry are dominated by small banks, the share or tax burden is less on shareholders as compared to customers. Across the banking industry that are highly concentrated, there are limited alternatives available to customers and this results in lower mobility (Capelle & Havrylchyk, 2013).  As a consequence of this, increased market power are enjoyed by big banks. Such banks would be able to rise fees and interest rates and would not have the fear of losing their customer base.

It is evident that there is high concentration in banking industry in Australia and concentration is more than US and middle pack of OECD nations and in contrast compare to European countries. Based on analysis conducted, it can be said that bank needs to transfer its higher costs imposed in form of levy to customers by rising the rate of interest rates and loans and borrowing. Interest rate on loans can be increased to 5 to 10 basis points due to 20 basis point levy according to study on G20 nations conducted by IMF. This is indicative of the fact that if the starting interest rate is assumed to be at 5.5% then for every $ 100000 borrowed, the monthly loan repayment would rise by $ 6. Customers are not the only party to be hit by this particular levy as stated by IMF. The growth of real Gross domestic product will fall down to 0.3% and that growth of assets of banks might fall by 0.05% (Cannas et al., 2016).

IFRS implementation and its impact on banks:

The shortcomings of IAS 39 is addressed by introduction of new international standard that is IRSR 9 in year 2018. Introduction of new standard will help in making the financial system of country or efficient and will help in lowering the risks. There are number of strategic challenges faced by banks and implementation of new standard will change the way banks classifies and measures the financial liabilities. Such standard would led to the introduction of tow stage model for reforming hedge accounting and impairment. Challenges faced by banks can be addressed by making fundamental to their business models and affecting diversified areas. Depending upon several factors such as transaction duration, economic sector and counter party ratings, new standard will make business lines and products structurally less profitable. Banks are required to reconsider their lending allocation to economic sector having greater sensitivity to economic cycle. IAS 39 does not make mandatory the calculation of expected loss on credit loans included in three-phase model of impairment (Mora, 2013).  

It has been found that 27% of banks are carrying out gap analysis along with 15% of them are yet to start journey with new standard as per the survey conducted in which 176 banking executives from Middle east, Asia and Europe has participated. It has been found that 9% of banks have already implemented the standards. However, standards would be applicable only after or on January 1^st, 2018. Banks in Australia are still lagging behind in the adoption of new standard (Elomäki, 2015). Banks would seek the previous adopters experience, consultants and technological firms’ advice, research when they are in the stage of implementation.

The global financial crisis 2008 has one of the contributory factor in terms of deferred recognition of credit losses on loans and financial instruments. Adoption of IFRS 9 standard will make it possible for banks for realising the expected losses on profits. The overall expected lifetime loss is minimized under IFRS 9. IFRS does not compute the expected credit loss as it does not employ effective model and concerning this, banks in Australia are required to have develop their own model in compliance with new standard. Furthermore, it should also be ensured by banks that employment of such models does not negatively influence their financial performance. As per the requirement of Basel, building of capital blocks from the portion of capital management (Ozawa, 2013). Nonetheless, there is requirement of recalibration of new standard that would help in categorizing debt instruments and commitment of loans.

Conclusion:

From the evaluation and analysis of the article, it can be concluded that burden of levy can be passed by banks onto customers by way of charging high fees and raising loan rates. The reason is attributable to the fact that levy imposed are not only liable for banks rather customers as well as they are the beneficiary of banking industry. In addition to this, banks are also transfer the levy burden to customers by way of higher fees and interest rates. Banks are required to employ their own developed model in compliance with IFRS 9 and does not impacting entity’s financial performance.

Reference:

Devereux, M. (2014). New bank taxes: Why and what will be the effects. Taxation and Regulation of the Financial Sector, 25-54.

Levy, J. D. (2016). The return of the state? France’s response to the financial and economic crisis. Comparative European Politics.

Cannas, G., Cariboni, J., Marchesi, M., Nicodème, G., Giudici, M. P., & Zedda, S. (2014). 10 Financial Activities Taxes, Bank Levies, and Systemic Risk. Taxation and Regulation of the Financial Sector, 203.

Elomäki, A. (2015). The economic case for gender equality in the European Union: Selling gender equality to decision-makers and neoliberalism to women’s organizations. European Journal of Women's Studies, 22(3), 288-302.

Capelle-Blancard, G., & Havrylchyk, O. (2013). Incidence of bank levy and bank market power.

Mora, N. (2013). The bank lending channel in a partially dollarized economy. Journal of Applied Economics, 16(1), 121-151.

Tongzon, J. L., & Lee, S. Y. (2015). The challenges of economic integration: the case of shipping in ASEAN countries. The Pacific Review, 28(4), 483-504.

De Mooij, R. A., Keen, M. M., & Orihara, M. M. (2013). Taxation, bank leverage, and financial crises (No. 13-48). International Monetary Fund.

Avgouleas, E., Goodhart, C., & Schoenmaker, D. (2013). Bank Resolution Plans as a catalyst for global financial reform. Journal of Financial Stability, 9(2), 210-218.

Eyal, G., & Levy, M. (2013). Economic indicators as public interventions. History of Political Economy, 45(suppl 1), 220-253.

Hao, G., Rainsbury, L., & Wang, S. (2016). International progress: reflections of General Hedge Accounting Standards.

Ozawa, T. (2013). First Impressions: IFRS 9 (2013)–Hedge accounting and transition.