One could simply argue that for there to be a tax on super profits there has to be super profits in the first instance and the Commonwealth’s $6 billion profit, while it might look like massive and controversy-generating, isn’t quite so provocative when one considers the group has nearly $650 billion of assets — the profits represents a return of less than 1% on its asset base.

One only has to look at Europe or the US to be reminded that far worse than a banking system that is too profitable is one that is unprofitable. The inherent leverage in banks means that there is a fine line between making a big profit and making a big loss.

It was also evident in the CBA result that its profitability tapered off as the year progressed and it started to feel pressure from rising funding costs and an inability to pass them on to its home loans.

This isn’t, however, a discussion in isolation. Other jurisdictions are actually imposing specific and additional taxes on banks, albeit in their cases it is largely to recover the costs of massive taxpayer bailouts.

The issue of levies on banks was discussed in a recent paper written by Kevin Davis, professor of finance at Melbourne University and research director of the Australian Centre for Financial Studies. Davis noted that the UK had announced a levy, applying from January next year, that starts at 0.04% of liabilities and eventually rises to 0.07%. An analogous proposal in the US has been abandoned but France and Germany have foreshadowed introducing their own balance-sheet levies.

Davis argued that the concept should be debated (although he wasn’t arguing that such a tax should be introduced) in Australia for several reasons. A balance sheet levy could, at the margin, discourage excessive risk-taking. It would reflect the inherent taxpayer backstop for “too big to fail” institutions and, Davis says, the federal government under-priced the fees it charged the banks for its guarantee of their liabilities during the crisis.

Apart from debating whether or not the major banks are raking in “super profits”, there are arguments against such taxes, not the least of which is that in a concentrated system dominated by the four majors they would simply pass the costs — the tax — on to their customers.

Even in a competitive system, it would be shareholders who would share the cost, in the form of lower returns. With the CBA distributing 74% of its profit to shareholders, 82% of whom are Australian and more than half those dividends going to 780,000 retail investors, that would again mean effectively taxing mainly individual Australians.

More broadly, while the wave of global prudential regulation that was supposed to flow as a result of the financial crisis now looks likely to be a little less powerful than it originally appeared, and its implementation will be delayed and the timelines stretched, the banks are facing more and more intrusive regulation. In particular, they will be required to be less leveraged, holding more capital and more and higher quality liquidity.

CBA and its peers are among the most strongly capitalised banks in the globe — they all have, using the European metrics, Tier 1 capital in the double digits when expressed as a ratio of risk-weighted assets. They are also holding probably unprecedented levels of liquidity — CBA has $89 billion of liquid assets.

That new conservatism is a good starting point for the evolution to even more conservative settings as the Australian banks seek to maintain their superior credit ratings and stay ahead of their global competitors as the new prudential regime is gradually imposed.

There is a cost to holding more capital and a cost to holding more liquidity. Judging by the CBA second half, much of that cost is, in its case at least, being absorbed by shareholders.

One could think of the cost of the more conservative settings as self-insurance against another crisis — or a form of tax imposed by regulators, encouraged by markets and begrudgingly accepted by the institutions that only recently peered into an abyss on riskier behaviours.

The new conservatism will eventually impact the supply and pricing of credit to bank customers as the banks seek to protect shareholder returns and their costs of capital. Adding a super profits tax or a levy on liabilities would almost inevitably exaggerate the impacts.

It could also, unless every jurisdiction introduced broadly similar taxes or levies, undermine their competitiveness.

A far preferable policy approach is to encourage and assist, without unduly distorting the playing field, competition to the big banks so that excess profitability, if it occurred, would be competed away. In some respects, because the four majors have emerged from the crisis with very different balance sheets, different corporate strategies and different strengths and vulnerability, that appears to be already happening.

arty