Europe’s banks will suffer less from U.S. tax

January 14, 2010

— Margaret Doyle and George Hay are Reuters Breakingview columnists. The opinions expressed are their own. —

European banks should suffer less than their American counterparts from the Obama administration’s proposed bank tax. The president’s proposed levy on banks’ wholesale funding requirements will hit all banks with a big presence on Wall Street. But assuming that U.S. banks will be taxed on their worldwide operations, the levy will hurt them more. This could be a major bonus for European investment banks — as long as their own governments don’t follow suit.

The levy would still hurt European banks with big operations in the United States. Take HSBC, which has total U.S. liabilities of $391 billion. Even allowing for an estimated $104 billion of government-insured deposits and equity, which are exempt, this still leaves $287 billion of liabilities that will be taxed. Assuming a levy of 15 basis points, the charge will cost HSBC $430 million a year. That’s about 8 percent of the bank’s pre-provision operating profits in North America, according to Morgan Stanley.

HSBC is particularly exposed to the tax because it has a large U.S. consumer finance subsidiary, which is barred by regulators from collecting deposits. European banks with U.S. retail operations, such as Spain’s BBVA, should fare better because they have more deposits. But large European players on Wall Street, such as Deutsche Bank and
Credit Suisse, are investment banking subsidiaries with minimal deposits. They are probably facing a similar hit to HSBC.

If U.S. banks are taxed on their global balance sheets, they will find it difficult to escape the tax. European banks, however, could respond by reducing their exposure to the United States. This would give European banks a competitive financial advantage over their Wall Street rivals.

But this advantage would only hold if their home countries don’t follow Obama’s lead. Given the obvious attractions of a tax that allows governments to pay back the respective bailouts of their financial sectors, that’s not something European banks can take for granted.

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