Don’t exclude Treasuries from the bank tax
I’m not a fan of excluding Treasuries from the proposed new bank tax. For one thing, Treasuries are assets, not liabilities: they’re technically not covered by the tax in the first place. What’s really being talked about here is the repo market, which has grown far too big, and which has made it far too easy for banks to borrow money at ultra-short maturities.
It’s true that if the repo market shrank dramatically, that might conceivably reduce demand for Treasuries so much that, as JP Morgan has suggested in a research note, the revenue from the fee could be completely offset by the Treasury’s increased costs of borrowing. On the other hand, estimates of the effects of reduced demand on Treasury prices are notoriously unreliable.
Against that is the fact that shrinking the repo market is probably the easiest and most painless mechanism that we have for shrinking the banks — and we want to shrink the banks. In that sense, the deleterious effect of the new fee on the repo market should probably be considered a feature rather than a bug. Let’s keep it in.