Ending the era of bank bailouts
The following is a guest post by Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University School of Law, and a former assistant general counsel to the Federal Reserve Board of Governors. The opinions expressed are his own.
As Scott Brown and Barney Frank hash out the difference between a tax and an insurance premium, it’s important to return to the very basics of banking. Banks are in the business of buying and selling money.
They buy money as deposits and other borrowings. They sell it as loans and investments. If someone with deep pockets is foolish enough to guarantee a bank’s deposits and borrowings, that bank can buy money more cheaply. Further, if that person gives his guarantee for free, the bank would have a competitive advantage.
If I told you that an elite class of banks has found such a fool to guarantee their debts, you’d probably want to know who it is. Well, it’s you and me, the taxpayers.
Then you’d want to identify the elite banks so that we could cut off the guarantee, or at least begin charging them for what we’re giving away. Does “too big to fail” ring a bell?
We have to come to grips with the fact that TBTF banks are taking us to the cleaners. Ridiculously, we continue to subsidize them. But there is a clear solution to this problem:
First: identify all the TBTFs. They are: Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs, Morgan Stanley, and Wells Fargo. Lest you think the list is arbitrary, be aware that the vaunted credit rating agencies (Moody’s and S&P) have already rated these firms according to the likelihood of their receiving “support,” i.e., a taxpayer subsidy.
Second: calculate the amount of the subsidy received annually by each firm. Again, this is a straight-forward mathematical exercise, called “notches,” the credit rating agencies award to them. The amount dwarfs any of the levies discussed thus far.
Third: require each bank to create a line item on its balance sheet called the “subsidy-reserve” into which goes the annual amount of subsidy it receives from taxpayers. This “subsidy reserve” will be available in the case of bankruptcy but it will not count as capital for regulatory purposes.
Fourth: require that the only way the reserve can be returned to shareholders is in connection with a divestiture or a spin-off of a line of business by the TBTF bank. Otherwise, it accumulates over time.
Financial regulation scorecard
A House-Senate conference committee must find a middle ground between financial regulation bills passed by the two chambers. The committee’s final report could differ from earlier versions.
Once approved by both chambers, the compromise legislation will go to President Barack Obama to sign it into law. That could happen by July 4, analysts say.
Here’s a look at the status of major points in the House and Senate financial regulation bills.
Swiss may need laws on banks’ structure-experts
BERNE, April 22 (Reuters) – Switzerland may have to force its large banks UBS<UBSN.VX> and Credit Suisse<CSGN.VX> to change their structure in order to limit the risks for the economy should either collapse, a government commission said on Thursday. (more…)
from The Great Debate:
Taxing spoils of the financial sector
If you want less of something, tax it.
That truism is often used as an argument against a tax on profits, or health benefits, or employment, but in the case of the rents extracted from the economy by the financial services industry here's hoping it proves more of a promise than a threat.
The International Monetary Fund has put forward two new taxes on banks to pay the costs of future rescues, one of which is a fairly conventional "Financial Stability Contribution," with an initial flat levy on all banks, to be refined later into something with more precise institutional and systemic risk adjustments.
More interestingly, the IMF is also proposing a "Financial Activities Tax," (FAT) a tax on bank pay and profits which, if correctly designed, could serve as a tax on rents -- the unwarranted spoils -- of the financial sector.
In economics the concept of "rents", essentially the extra money a given individual or industry is able to extract from its clients above what it would if there were perfect competition, is central. If there is only one cable television provider in your neighborhood you will know what I am talking about.
In financial services, the evidence is that rents are huge, in part because of impaired competition and in part because increasingly complex financial services allow banks to sell clients products that they don't understand, may not need and will almost always be over-charged for. Bank employees in turn charge hefty rents to their bosses, boards and shareholders, each of whom, as you journey up the organizational chart, understand less about the complex services, and like clients, are then less able to defend their own interests.
Some of the best evidence forming the intellectual underpinning of this is provided by economists Thomas Philippon of New York University and Ariell Reshef of the University of Virginia, whose work found that about 30 to 50 percent of the extra pay bankers get as compared to similar professionals is attributable to rents. <http://people.virginia.edu/~ar7kf/paper s/pr_rev15_submitted.pdf>
As a long in the tooth former consultant to Central Banks & Commercial Banks, here is my “old fashioned” view.
Banks are the primary engine driving the world’s economy.
Tax the Banks and they will pass it on their customers.
More expensive money means Less economic dynamism & incidentally more unproductive public service costs to regulate.
Obama must have fools for advisers.
But what do I know, it is 20 years since I was advising governments of the world.
New capital targets to cushion all loan losses-Irish regulator
DUBLIN, April 21 (Reuters) – Ireland’s financial regulator said the strict new capital levels Irish banks must meet will cushion losses on smaller loans and not just the riskier batches being moved to the country’s “bad bank.” (more…)
from MacroScope:
A “Greed Tax” on banks
The International Monetary Fund has done what it was bid by the G20 and come up with proposals for getting banks to pay for the government help they receive when they get in trouble. You can read the actual wording here, but it comes down to this:
1) A "Financial Stability Contribution" which would be pooled into a fund that would use it to help weak banks, or just go into general government revenues.
2) A "Financial Activities Tax" -- perhaps intentionally known as FAT -- to be levied on combined bank profits and remuneration (for which read "bonuses") and paid to governments.
The first is a kind of insurance policy. The second, however, looks decidedly like what might be called a Greed Tax -- government action on the kind of wealth that has infuriated taxpayers across the world.
The debate will be over whether this is simple kowtowing to populist sentiment or whether it is a reasonable limit on people being accused of knowing none.
ANALYSIS – Obama tackles Wall Street reform in next big push
By Caren Bohan
WASHINGTON, March 25 (Reuters) – Fresh from his victory on landmark healthcare legislation, U.S. President Barack Obama is ready to take on Wall Street.
In the same week Obama signed into law his sweeping healthcare plan, his administration began a publicity blitz to sell his proposal to reshape the financial regulatory system.
Obama held a strategy session on Wednesday with two Democrats, Senate Banking Committee Chairman Christopher Dodd and House of Representatives Financial Services Committee Chairman Barney Frank, who are leading the effort to pass the plan in Congress.
Democrats hope the healthcare win will lend momentum to the push on financial reform, an issue the White House hopes will be a political winner as the party seeks to stave off potential losses in the November congressional elections.
“The good news is that, whereas the Republican message machine managed to convince a lot of Americans that the healthcare bill was bad for them, I think they will have a harder time with the financial reform,” said Princeton University professor Alan Blinder. “Rightly or wrongly everybody hates Wall Street and the banks right now.”
The White House has sought to tap into public fury over Wall Street’s excesses to push its case for financial reform.
US FDIC extends protection for securitized assets
By Karey Wutkowski WASHINGTON, March 11 (Reuters) – U.S. bank regulators extended a policy on Thursday that protects securitized assets in the event that a bank fails and is seized by regulators. (more…)
Czech central bank sees banks withstanding shocks
PRAGUE, Feb 23 (Reuters) – The Czech banking system will maintain sufficient capital adequacy in all projected scenarios of economic and market development, central bank stress tests showed on Tuesday. (more…)
Banks should help fund stability measures -Buba
VIENNA, Feb 22 (Reuters) – Banks should contribute toward financial stability measures, but a blanket levy on total assets could worsen future crises, the vice president of Germany’s Bundesbank was quoted as saying on Monday. (more…)
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Financial Regulatory Forum
This article is excellent, it points out banks are in business for profit and gamble with the tax payer money.
This seems to be a major hurdle in reform, as we do not have the political will to say no to bail outs.
i.e., we have no objection to the banks management betting the firm on a profit and loss scheme; after all it is the bank share holder’s cash.
However, the concept and implementation of bailouts is to say the least flawed logic.