The Bank Levy Fallacy

Fairness, who really pays, and why investors should be worried

BusinessDesk’s Dileepa Fonseka and the Herald’s Jamie Ensor have both reported on the National government contemplating a bank levy. Minister of Finance Nicola Willis’ rationale is straightforward: “We don’t want to be in a situation where New Zealand’s tax settings are out of date.” Fair enough: no one wants outdated tax settings.

But the more pressing question is about fairness.

New Zealand’s banking market is dominated by four large Australian-owned banks with considerable pricing power. They will, almost with certainty, pass a levy on to their customers. And who are those customers? Mortgage holders (people aged 30 to 60 supporting their families through a cost-of-living crisis) and small and medium-sized businesses. Many of these are the very National voters who will end up footing what amounts to a stealth tax. Meanwhile, those wealthy enough to own their homes outright are largely insulated. Is it fair to tax hardworking families and small business owners while exempting the mortgage-free?

Fonseka notes that investors may also absorb part of the levy. But New Zealand bank shareholders ultimately are institutional investors: pension funds and insurance companies. And some of their customers, stakeholders, or owners may be Kiwis. Which means, once again, that ordinary savers ultimately pay.

Investor uncertainty

There is a second, less obvious concern: investor uncertainty. A levy reduces bank profits, and with them, dividends. But the deeper damage comes from the precedent it sets. Future governments may want more: a higher levy, broader scope, or new restrictions on payouts. Investors who cannot rely on a predictable dividend stream will price in that political risk, discounting bank shares accordingly. No investor wants their returns subject to arbitrary decisions by a government in need of revenue.

This may sound theoretical, but there is a concrete precedent. During COVID, the ECB and other supervisors urged banks to suspend dividend payments “to preserve capital.” At the time, a sensible idea. The outcome, however, was problematic. Dividend uncertainty fed directly into higher costs of capital and falling share prices, precisely the opposite of what regulators wanted during a period of stress. The experience was sobering enough that the ECB subsequently announced it would not issue blanket guidance restricting bank dividends again.

Isn’t it ironic?

Finally, it is worth noting that the previous Labour government also explored a bank tax. It never materialized. My Newsroom piece Taxing banks’ excessive profits – be careful what you wish for gives a good account of why. The concerns raised then remain relevant today.