SCENARIOS – Bank tax idea gains traction, still ill-defined

By Reuters Staff
February 16, 2010

  LONDON/WASHINGTON, Feb 16 (Reuters) – World leaders want banks and financial firms to pay up for government interventions — past and future — to stabilize the international financial system. While details are sketchy, some form of bank balance sheet tax appears to be gaining ground.

Bank tax proposals vary widely, with global coordination seen as crucial, but hard to attain as ever, with all eyes on an upcoming International Monetary Fund report due in April.

Any levy that might result must dovetail with strategies for tackling the “too big to fail” issue, related moral hazards, resurgent banker bonuses and capital standards.

British Prime Minister Gordon Brown said last week he expects the G20 to agree on a bank levy this year. The G7 called for one at its Feb. 5-6 meeting in Canada.

But basic questions remain. Would it be temporary or permanent? Is it chiefly about recouping money spent in the credit crunch? Or is the goal to impose a permanent “insurance” premium to build up funds for future rescues?

Below are the main ideas being debated and a look at how likely they are to win broad support.

 

BALANCE SHEET TAX

U.S. President Barack Obama has called for a levy of 0.15 of a percentage point on the balance sheets of firms with assets over $50 billion to recoup taxpayer bailouts. It would raise $117 billion, but would need Congressional approval.

This month the G7 called for closer study of a UK proposal for a bank levy to cover the cost of the 2008-2009 bailouts.

Sweden is imposing a direct levy on bank loans to recoup $10.6 billion from its banks for a financial crisis fund.

Britain’s opposition Conservatives, who are widely expected to return to power at national elections this year, have voiced support for the Swedish idea if applied globally.

Some members of the European Parliament back forcing banks to pay into an emergency fund to cope with future crises, a document seen last week by Reuters showed. But it is far from a done deal and would need support from EU states to become law.

In a report on policing banks, the lawmakers expressed support for a European Financial Protection Fund to protect savers, banks in difficulty and the broader market.

The report calls for financing “through contributions from these institutions, debt issued by the fund or in exceptional circumstances through contributions made by the affected member states.” It proposes that payments into the fund from banks replace those made to national deposit guarantee schemes.

 

NONBANK DISSOLUTION FUND TAX

The U.S. House of Representatives has approved creating a $200 billion fund to help pay for liquidating insolvent, nonbank financial firms through bankruptcy or receivership.

This “dissolution” process would resemble how the U.S. Federal Deposit Insurance Corp. currently dismantles insolvent banks, a process that has worked well for decades.

The new fund would get $150 billion from fees charged to firms with more than $50 billion in assets, with another $50 billion from borrowing from the U.S. Treasury Department.

The Senate is debating a similar approach that puts a greater emphasis on bankruptcy and assesses fees against firms only after a rescue has taken place, not before.

The FDIC’s well-established deposit insurance fund, in place since 1934, would continue. But under the House bill, the fees it charges would become risk-based, relieving the burden shouldered by small banks for maintaining the fund.

 

TRANSACTIONS TAX

Some countries like Germany have called for a financial transactions tax, sometimes dubbed a “Tobin Tax,” named after economist James Tobin.

Tobin in the 1970s proposed a tax on cross-border foreign exchange transactions to curb speculation and raise large sums for development in poor countries threatened by declines in aid.

A transaction tax was among ideas put forward by Brown at the G20 summit late last year in Pittsburgh.

Transaction taxes face an uphill battle in the United States amid opposition from powerful financial interests that hold substantial sway in a politically gridlocked Congress.

The U.S. House is eyeing a pair of proposals to slap a 0.25 percent tax on over-the-counter derivatives transactions and stock trades, but Senate support for this looks unlikely and the Obama administration is skeptical.

 

BONUS TAX

Just months after being bailed out by taxpayers, banks are again paying executives multimillion-dollar bonuses, angering the public and giving political momentum to bonus taxes.

Britain has imposed a 50 percent levy on large bank bonuses. France’s lower house of parliament has passed a bank bonus tax amendment. A parliamentary commission in France’s Senate on Feb. 10 voted to broaden the banker bonus tax.

The United States, where bankers take home by far the world’s largest paychecks, has not yet followed suit.

Last week another Democrat in Congress proposed a tax on bonuses aimed at getting back government bailout money. The proposal would impose a 50 percent tax on cash and stock bonuses of more than $25,000 at bailed-out firms.

There is a similar proposal in the U.S. House, but it is unclear how much backing either one will get amid intense opposition by the banking industry and Wall Street.

Keywords: FINANCIAL REGULATION/TAX

 

WHAT WILL FLY?

A bonus tax is already in place in Britain, with France moving in the same direction. Political support is building for one in the United States, although it will face stiff resistance in the Senate.

Many believe a Tobin Tax is dead in the water as the United States is opposed to it and no other major financial center would introduce it without U.S. backing.

Chances of a balance sheet tax of some sort appear to be increasing. There is no consensus on how it would work — whether it would only recoup public money used in rescues that have taken place, or be an “insurance” fee for future rescues, or both.

Critics say creating funds for future bailouts would encourage banks to take on more risks, knowing there is a safety net in place. And there is the issue of who would look after the fund — or funds — if they are country-based.

(Reporting by Huw Jones in London; Kevin Drawbaugh, Kim Dixon and Lesley Wroughton in Washington; John O’Donnell and Julien Toyer in Brussels; Editing by Leslie Adler) ((Reuters messaging: huw.jones.reuters.com@reuters.net; + 44 207 542 3326; huw.jones@thomsonreuters.com))

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