The bank tax is just an increase in cost of funds

By Felix Salmon
January 14, 2010
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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)

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