Opinion

Felix Salmon

The bank tax is just an increase in cost of funds

By Felix Salmon
January 14, 2010

Here’s one more way to look at the new bank tax, courtesy of the equity analysts at Oppenheimer & Co: it basically has the same effect on the banks hit by it as would a 15bp rise in the Fed funds rate. And much like an increase in Fed funds, it’ll simply end up getting passed through to customers in the form of higher loan rates. Which doesn’t mean that lending will fall — in fact, the Oppenheimer analysts reckon that any decrease in lending will be “barely measurable”, and will come about mainly in the form of lower demand for loans rather than less supply of credit from the banks.

Meanwhile, an anonymous “senior industry leader” from the murky depths of the financial-services industry emerges to inform Politico that lending could be hit to the tune of $1 trillion as a result of this fee. Don’t believe it. The reason that the source is anonymous is that he would never say something that bald-facedly ridiculous on the record. Banks already have excess cash on their balance sheets, and they won’t reduce lending by $1 trillion for every 15bp that their cost of funds increases. If that were true, then a 200bp rise in interest rates would reduce lending by roughly 100% of GDP.

It’s right and proper that too-big-to-fail banks should have a higher cost of funds than smaller community banks, given the extra systemic risk that they pose. Even after this tax, they probably won’t, thanks to the moral hazard play. But at least it’s a step in the right direction.

(HT: Weisenthal, Choksi)

Comments
2 comments so far | RSS Comments RSS

Felix:
Very interesting set of posts today regarding the proposed bank tax, the interplay with TBTF incentive issues, and the benefits of the TBTF designation in terms of reduced borrowing costs. Given the demonstrable benefits to the TBTF banks of the federal support they enjoy, there would appear to be an opportunity here to use this tax not just to enrich the fisc, but to also promote other objectives such as reducing TBTF benefits and incentives for excessive leverage. It would be interesting to hear your thoughts as to what those objectives might be and how the proposed tax could be structured to achieve those ends. For example, can the tax be structured to provide us with a “two fer” in terms of policy objectives (revenue collection and reduction of TBTF benefits and incentives to become TBTF). Would an ecalating rate based on the amount of liabilities (excl deposits) promote this? Can the tax be structured to make it less likely to be passed onto borrowers? What would be the pros/cons of a “windfall profits” tax that disallowed bonus deductions above a certain level? Would one tie a windfall tax to the cost of capital differantial? There seem to be lots of interesting possibilities here to structure this proposed tax to achieve various policy objectives that are currenty in the public’s eye. It would be interesting to hear more from you on all of this.

Posted by EconMike | Report as abusive
 

“Meanwhile, an anonymous “senior industry leader” from the murky depths of the financial-services industry emerges to inform Politico that lending could be hit to the tune of $1 trillion as a result of this fee. ”

If I was going to say something as ridiculous as this, I wouldn’t want my name associated with it, either.

But murky depths of the industry is right. Like the sewer.

Posted by OnTheTimes | Report as abusive
 

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