Updated May 23, 2017 13:43:14

Photo: Bank of Queensland was one of 23 regional banks and smaller financial institutions downgraded by S&P. (AAP: Tony Phillips - file photo)

If the major banks harboured any hopes of a successful war against the new bank levy, ratings agency Standard & Poor's this week punched a hole right through it.

The agency's decision to downgrade every major financial institution bar the big four and Macquarie highlights exactly why the major banks need to stump up the cash.

Each of the five banks - Commonwealth, Westpac, ANZ, NAB and Macquarie - piggyback off the Commonwealth's AAA credit rating.

Each have been deemed "too big to fail" and S&P this week made it clear the reason they have not suffered a downgrade is because they enjoy explicit government backed financial support, "which in our view offsets the deterioration in these banks' Stand Alone Credit Profiles" if the latent risks in the Australian property take a turn for the worse.

That is a startling argument, especially when you consider that Australia's big four banks hold 80 per cent of Australian mortgages, which now top $1.5 trillion.

Clearly, if there was a property market crash, or even a sharp correction, the major banks would suffer the most. There would be a blow-out in bad debts and the major banks would, at the very least, see their earnings under serious pressure and, on a worst case scenario, a Government bailout.

But, even as S&P delivered its hammer blow to Australia's other 23 financial institutions, which will all see their funding costs rise, the major banks were ramping up their opposition to the bank levy.

It would cost them, collectively, around $1 billion a year, they noted in separate filings to the Australian Securities Exchange.

The Government says the banks can "absorb" the tax, but what does that actually mean?

What irony!

The levy has become a vital measure in the Federal Government's budget repair strategy in a bid to retain the Commonwealth's AAA credit rating.

That Commonwealth credit rating directly benefits the major banks, because of the government guarantees, by allowing them to raise cash at a rate that is cheaper than if they were standing alone. That boosts their earnings and, as a direct result, the salaries and bonuses of those who run the banks.

The major banks refuse to acknowledge the taxpayer assistance they receive, let alone contribute any payment for it.

In addition to their "too big to fail" status they, like all other Australian deposit taking institutions, also enjoy a guarantee over their customers deposits, up to $250,000.

That insurance policy alone, which is provided free of charge, is worth a 0.05 per cent fee, according to submissions by the Treasury and the Reserve Bank.

But the cat is now out of the bag. The implicit Federal Government support is worth far more. It is a direct competitive advantage to the major banks that the regionals and other institutions do not enjoy.

Topics: banking, business-economics-and-finance, tax, federal-government, budget, australia

First posted May 23, 2017 11:52:53