Bair wants a bank-size tax

By Felix Salmon
July 16, 2009

Sheila Bair and Ben Bernanke are on board with the idea of taxing banks to give them an incentive to shrink:

The FDIC will propose slapping fees on the biggest bank holding companies to the extent that they carry on activities, such as proprietary trading, outside of traditional lending. The idea goes beyond the Obama administration’s regulation-overhaul plan, which would have the Fed adjust capital and liquidity standards for the biggest firms, without any pre-set fees.

“What we have suggested is financial disincentives for size and complexity,” Bair said in a July 9 interview. Fed Chairman Ben S. Bernanke told lawmakers last month that restricting size is a “legitimate” option.

This is great news, even if it took Bloomberg a full week to report it. Notes Ryan Chittum:

Another bit of weirdness is that its interview with Bair was on July 9 but is only being reported now. There must have been some sort of embargo for Bloomberg not to report this big news for a week.

Why would Bair give an interview on July 9 but tell Bloomberg her statements couldn’t be used until July 15? That doesn’t make any sense at all. Maybe it took that long for Bloomberg to ferret out the details of what she was talking about: “financial disincentives for size and complexity” is vague, while the idea of charging fees for prop trading is much more specific. In any case, I hope that Bair’s idea gets traction in both Treasury and the White House.

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Comments
4 comments so far

Complexity is the main obstacle for good rules and enforceable rules. With a complex reality you usually end up with complex rules. That in turn puts the regulators in a situation where they are supposed to enforce complexity squared. Add a spoonful of low pay and bureaucracy, and stir until it all collapse.

The tough part is finding a way to measure complexity that cannot be gamed. Remember this is the very same people who gamed Basel, gamed the tax code, fooled the FED and went away with US taxpayers money.

The complexity of the individual products and trades could be measured by the time one person, starting with the complete set of documents of the transaction/product only, needed to complete a reverse engineering and write a report on the economic realities of that transaction/product. If the report was off the mark by a margin, the product would get a maximum score for complexity.

Posted by Gaute | Report as abusive

Is it more important to limit size than risk? It’s not the size of the bank that’s the problem, it’s the amount of risk they take on, relative to their assets. A bunch of smaller banks with too many stupid loans is not going to be much better than one large one with a proportionately smaller number of risky loans. Shouldn’t the taxes be based on loan ratios, rather than total loan values?

Posted by KenG | Report as abusive

A simpler solution would be to limit leverage based on size. If most banks are currently 10:1 then the ratio should decline as banks get larger. Above a certain asset size (i.e. $300 billion) the ratio would start declining so that by the time you had JPM at $2 trillion of assets it would need $500 billion of equity (4:1). No way this ever happens, due to regulatory capture, but it would be a simple solution that would be favored by all but the largest institutions. It obviously wouldn’t be painless, but given the performance of the largest firms by asset value, (FNM, FRE, AIG, C, MER, BAC all failed or needed substantial gov’t help), we need to have more capital behind the largest firms. Before interstate banking reform, asset size was limited and problems were more regional.

Posted by GT | Report as abusive

Why is this limited to large bank holding companies? Won’t GS and MS simply revoke their BHC status if/when such a rule is enacted? Sure they’ll lose access to the discount window, but if they ever get into any real trouble, they’ll no doubt be granted funding on favorable terms by virtue of their being systemically important.

Suggested edit: Replace the rules-based (and gameable) “large bank holding company” with “systemically important entity” (and leave that undefined in the statute).

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