Global bailout fund looks unlikely to fly

February 1, 2010

Regulators and bankers rarely see eye to eye. But at the World Economic Forum in Davos, the two sides were in surprising agreement about creating a global fund, financed by a tax on banks, to deal with future bailouts.

Mario Draghi, head of the Financial Stability Board, which is spearheading a new global financial regulatory regime under the auspices of the G20, floated the idea of a cross-border body to manage this fund. Surprisingly, several big European banks — including Barclays and Deutsche Bank — support it.

Draghi’s plan has merits. The crisis has shown how ill-prepared regulators were to deal with the failure of large, cross-border financial institutions. Setting up a permanent body to co-ordinate between the different countries in which a bank operates makes sense.

There is also excellent logic for a bank levy — on the lines of President Barack Obama’s proposed tax on U.S. banks’ wholesale liabilities. Though most banks pay fees to insure their retail deposits, there is no such charge for the short-term wholesale financing that made some banks particularly vulnerable to a sudden loss of confidence.

However, a cross-border bailout fund looks a stretch. To begin with, it would take years to create a fund that was sufficiently large to deal with banks that ran into trouble. In the meantime, governments would still be on the hook.

It is also hard to see governments giving up responsibility for bailing out their banks. After all, their support during the crisis often came in the form of direct equity injections. The politicians aren’t going to swallow a cross-border agency taking large ownership stakes in banks like Citigroup and Royal Bank of Scotland.

But the biggest objection to a global bank tax is likely to be fiscal. Cash-strapped governments will never allow a meaningful amount of tax revenue to disappear into a global fund.

It is important that bank reforms should be coordinated globally. But the best that can be hoped for on the fiscal front is a series of national taxes that all operate roughly according to the same principles.

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Peter, at first blush it seems like a good idea but quite frankly not likely to be able to raise anywhere near the sums that will be needed,if,heaven forbid,we have a similar mess at some future moment……

Posted by MHB | Report as abusive