Bank tax

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Senate Finance chairman says bank tax unlikely

The Senate Finance Committee chairman tells The Hill he doesn't think there are 60 votes for a bank tax.

Senate Finance Chairman Max Baucus (D-Mont.) on Tuesday told The Hill that he did not believe his chamber had the 60 votes needed to include a bank tax in the financial reform bill currently being debated on the floor.

"I don't think it has 60 votes on this bill," he said.

Baucus hosted a hearing on the bank tax earlier today that included testimony from Treasury Secretary Timothy Geithner. The secretary urged lawmakers to include the levy in the financial reform bill.

However, Baucus told The Hill the prospect of that occurring was unlikely given the fact that the reform bill did not originate in the House.

"It's not an H.R. bill," he said. "It would have to be blue slipped."

The term "blue slip" refers to senators using a bill that originated in the House as a vehicle for their legislation.

Congressional rules require that tax legislation originate in the House, which would make it an H.R. bill.

The financial reform bill was created in the Senate. That means to incorporate the bank tax into the legislation senators would have to use an H.R. bill, which Baucus indicated would not happen.

Beyond that, Baucus also indicated it would be tough to win political support for the tax in the Senate.

Several members of his panel on Tuesday questioned Geithner about whether the tax would hurt businesses by limiting credit.

Senate Finance Committee hearings on bank tax

U.S. Treasury Secretary Timothy F. Geithner said a proposed bank tax would target big financial companies that use short-term funding to finance risky practices such as derivatives and off-balance sheet trading.

“We designed the fee so that it would fall most heavily on firms that fund riskier activities with less stable forms of funding,” Geithner said today in prepared testimony to the Senate Finance Committee.

The Obama administration has asked Congress to enact a “financial responsibility fee” to recoup the costs of the Troubled Asset Relief Program. The fee would raise $90 billion over 10 years and would stay in place until the government recovers all the costs of the bank rescue, Geithner said.

Banks and other financial companies with more than $50 billion in assets would pay the fee, based on a formula to measure assets, liabilities and risk. Firms engage in riskier trading would pay more than “more conservatively” managed firms, and 99 percent of U.S. banks would be excluded from the fee, he said.

The U.S. has endorsed an effort by the Group of 20 nations to have banks shoulder financial rescue costs after governments and central banks provided an estimated $11 trillion to institutions including Citigroup Inc., Royal Bank of Scotland Plc and American International Group Inc.

In meetings last month, Geithner sought to bridge the gap between European proposals to tap banks for revenue and Canadian opposition to a fee on banks that didn’t need help during the crisis.

In today’s testimony, Geithner said the U.S. would continue its efforts to forge an international consensus.

“We want to design the fee in a way that improves the chances that other governments will adopt similar measures,” Geithner said. He said the Obama administration also would work with Congress to find the best approach for the U.S. financial system.

Obama Administration abandons support for resolution fund

"...The statements from Brown and McConnell came two days after the administration signaled it would push Democrats to drop a provision in their bill that Republicans broadly oppose: a $50 billion liquidation fund, raised by imposing a tax on major financial institutions, that would be used to cover the government's costs in the event that it has to liquidate an insolvent firm.

On Friday, after news of the administration's position broke, McConnell made clear he wanted to see more. "I appreciate the Obama administration's recognition of the need to substantively improve this bill," reads McConnell's official statement. "And I hope we can work with them to close the remaining bailout loopholes that put American taxpayers on the hook for financial institutions that become 'too big to fail.'"

Proposed US bank tax overview

Financial Crisis Responsibility Fee

Today, the President announced his intention to propose a Financial Crisis Responsibility Fee that would require the largest and most highly levered Wall Street firms to pay back taxpayers for the extraordinary assistance provided so that the TARP program does not add to the deficit. The fee the President is proposing would:

Require the Financial Sector to Pay Back For the Extraordinary Benefits Received: Many of the largest financial firms contributed to the financial crisis through the risks they took, and all of the largest firms benefitted enormously from the extraordinary actions taken to stabilize the financial system. It is our responsibility to ensure that the taxpayer dollars that supported these actions are reimbursed by the financial sector so that the deficit is not increased.

Responsibility Fee Would Remain in Place for 10 Years or Longer if Necessary to Fully Pay Back TARP: The fee – which would go into effect on June 30, 2010 – would last at least 10 years. If the costs have not been recouped after 10 years, the fee would remain in place until they are paid back in full. In addition, the Treasury Department would be asked to report after five years on the effectiveness of the fee as well as its progress in repaying projected TARP losses.

Raise Up to $117 Billion to Repay Projected Cost of TARP: As a result of prudent management and the stabilization of the financial system, the expected cost of the TARP program has dropped dramatically. While the Administration projected a cost of $341 billion as recently as August, it now estimates, under very conservative assumptions, that the cost will be $117 billion--reflecting the $224 billion reduction in the expected cost to the deficit. The proposed fee is expected to raise $117 billion over about 12 years, and $90 billion over the next 10 years.

President Obama is Fulfilling His Commitment to Provide a Plan for Taxpayer Repayment Three Years Earlier Than Required: The EESA statute that created the TARP requires that by 2013 the President put forward a plan "that recoups from the financial industry an amount equal to the shortfall in order to ensure that the Troubled Asset Relief Program does not add to the deficit or national debt." The President has no intention of waiting that long. Instead, the President is fulfilling three years early his commitment to put forward a proposal that would – at a minimum – ensure that taxpayers are fully repaid for the support they provided.

Apply to the Largest and Most Highly Levered Firms: The fee the President is proposing would be levied on the debts of financial firms with more than $50 billion in consolidated assets, providing a deterrent against excessive leverage for the largest financial firms. By levying a fee on the liabilities of the largest firms – excluding FDIC-assessed deposits and insurance policy reserves, as appropriate – the Financial Crisis Responsibility Fee will place its heaviest burden on the largest firms that have taken on the most debt. Over sixty percent of revenues will most likely be paid by the 10 largest financial institutions. How the Fee Would Work

While more complete details of the proposed Financial Crisis Responsibility Fee will be released in conjunction with the President's budget, the basic outline of the fee is as follows:

Levied on Only the Largest Financial Firms with the Most Leverage

Applied Only to Firms with More Than $50 Billion in Consolidated Assets: The fee would only be applied to firms with more than $50 billion in consolidated assets. No small or community bank would be covered by the fee.

Fee Would Cover Banks and Thrifts, Insurance and Other Companies That Own Insured Depository Institutions, and Broker-Dealers:

Covered institutions would include firms that were insured depository institutions, bank holding companies, thrift holding companies, insurance or other companies that owned insured depository institutions, or securities broker-dealers as of January 14, 2010, or that become one of these types of firms after January 14, 2010.. These institutions were recipients and/or indirect beneficiaries of aid provided through the TARP, the Temporary Liquidity Guarantee Program, and other programs that provided emergency assistance to limit the impact of the financial crisis.

Both Domestic Firms and U.S. Subsidiaries of Foreign Firms Subject to the Fee: The fee would cover the liabilities of all firms in these categories organized in the U.S. – including U.S. subsidiaries of foreign firms. Operations of U.S. subsidiaries of foreign firms in the areas cited above would be consolidated for the purposes of the $50 billion threshold and administration of the fee.

For those firms headquartered in the U.S., the fee would cover all liabilities globally. The Administration will also work through the G-20 and the Financial Stability Board to encourage other major financial centers to adopt comparable approaches. Fee Assessed at Approximately 15 Basis Points (0.15 Percent) of Covered Liabilities Per Year

How Liabilities Subject to the Fee Would Be Determined: Liabilities subject to the fee would be defined as:

Covered Liabilities = Assets - Tier 1 capital - FDIC-assessed deposits (and/or insurance policy reserves, as appropriate)

Exempting FDIC-Assessed Deposits and Insurance Policy Reserves As Appropriate: The fee will exempt FDIC-assessed deposits because they are stable sources of funding covered by deposit insurance and already subject to assessment. Similarly, the base for the fee would be appropriately reduced based on insurance policy reserves.

How the Fee Would Be Assessed: Covered liabilities would be reported by regulators, but the fee would be collected by the IRS and revenues would be contributed to the general fund to reduce the deficit. The Administration will also work with Congress and regulatory agencies in order to design protections against avoidance by covered firms.


House Ways and Means to examine bank tax

"Representative Sander Levin, the new acting chairman of the House Ways and Means Committee, said imposing a fee on financial firms is “worth considering” and that he intends to press his proposal to boost taxes on executives at private equity firms.

Levin, a Michigan Democrat, said in an interview yesterday he’ll convene the committee soon to examine the $90 billion fee plan proposed by President Barack Obama to compensate the government for bailout money provided to American International Group Inc. and other companies through the Troubled Asset Relief Fund.

“I think it’s worth considering, but we need to sit down, look at the proposals and study them,” Levin said of the Financial Crisis Responsibility Fee. “The committee hasn’t had a chance to do it, and we will.”

The committee already is considering changes to the proposal, such as basing it on a financial institution’s income rather than liabilities, panel spokesman Matthew Beck has said.

Levin, 78, took control of the panel yesterday following the March 3 decision by Representative Charles Rangel, a New York Democrat, to step down from the chairmanship, at least for now, amid a House ethics committee investigation of multiple alleged misdoings. Rangel, 79, last week was admonished by the ethics panel for violating the chamber’s gift rules.

Levin, who first won his House seat in 1982, ascends to the Ways and Means Committee helm as the panel is pivoting from playing a crucial role on overhauling the health legislation to addressing a series of pressing tax matters.

Repo market to escape planned US bank levy

The Obama administration plans to exclude a crucial part of the financial system from a proposed levy on banks’ administration, officials disclosed on Monday.

Under the proposed financial crisis responsibility fee, banks would pay a fee of 15 basis points on all liabilities above $50bn (€36bn, £31bn) that are not already subject to an insurance premium paid to the Federal Deposit Insurance Corporation.

That placed the $3,800bn US repurchase, or “repo”, market, in which securities are used as collateral for short-term loans, squarely in line for paying the fee.

Such a scenario deeply alarmed bankers, such as Jamie Dimon, chief executive of JPMorgan Chase – one of the biggest players in repos – and also rang alarm bells with regulators such as the Federal Reserve and US Treasury.

Late last week an official at the US Treasury said it was considering ways to sustain repo trading under the proposed levy. The 15bps charge is three times the standard difference between the interest rates banks borrow and lend at, thus threatening the viability of the repo sector.

Now, banks with large repo operations and which use the market to borrow cash for short periods and also provide funding for investors wanting to buy the securities will be able to get special treatment for these assets under the proposed levy.

The move marks a concession by the administration after bankers warned that the levy could force them to scale back low-margin repo operations in which they lend against Treasury bonds, which would undermine liquidity in the US government debt market.

The use of repo is mainly confined to US Treasuries and dealers argued that any disruption in the sector would threaten the future stability and efficiency of the US government bond market, at a time of rising debt issuance.

Wall Street banks hiding approx 42% of liabilities at quarter end

"Leading Wall Street investment banks have been accused of understating debt levels used to finance security trades by an average of 42 per cent at the end of each financial quarter for the past five quarters.

A group of 18 banks including Goldman Sachs, Bank of America, JP Morgan and Citigroup, which release debt data each quarter, subsequently boosted the debt levels in the middle of successive quarters, according to The Wall Street Journal.

The findings were based on data from the Federal Reserve Bank of New York. They suggest that 18 months after the collapse of Lehman Brothers and the ensuing global financial crisis that was in large part sparked by excessive leverage at financial institutions, banks have become very sensitive about showing high levels of debt and risk for fear that their credit ratings and share prices might suffer.

While the practice of “window dressing”, or using cosmetic devices to make published accounts look more attractive, is not necessarily illegal or uncommon, the findings have led some to question how much the banks have learnt from the crisis."

House panel may tax bank income

"House lawmakers may retool President Barack Obama’s proposed $90 billion fee on the 50 biggest financial firms, a spokesman for the House Ways and Means Committee said.

One idea under discussion would base the fee on income rather than assets as proposed by the president Jan. 14, said Matthew Beck, the committee spokesman.

“The committee expects to discuss a number of approaches to ensure American taxpayers are made whole for their extraordinary assistance to financial institutions in recent years,” Beck said in an e-mailed statement. “A levy based on income is one approach that will be part of this broad discussion.”

A committee aide familiar with the discussions and not authorized to comment on them said lawmakers also are discussing applying the fee to executive bonuses that would otherwise be deducted from company income.

Obama proposed the fee last month, saying it is aimed at getting back “every single dime” that taxpayers put into bailed-out banks during the financial crisis.

The fee would apply to financial companies with assets of more than $50 billion, and it would raise $90 billion over a decade. The 0.15 percent fee would be based on bank liabilities and would be imposed starting June 30 on companies such as New York-based Citigroup Inc., American International Group Inc. and Charlotte, North Carolina-based Bank of America Corp.

Assessing the Fee

In addition to protesting the fee itself, banks, insurers, mutual funds and other financial-services companies have complained about how it would be assessed, said Scott Talbott, senior vice president of government relations for the Financial Services Roundtable, a Washington-based lobbying group.

Obama proposed basing the fee on liabilities minus deposits. Insurance companies in particular don’t generally have deposits to subtract, Talbott said.

“It’s less disproportionate” to assess the fee based on income, Talbott said. “It applies to all companies based on their success, rather than their structure.”

Congressional action on proposed tax

President Barack Obama’s plan to recoup at least $90 billion in U.S. bailout money by imposing fees on large financial firms will be backed by the House of Representatives, Representative Chris Van Hollen said.

A similar measure won House approval as part of regulatory overhaul legislation passed in December, Van Hollen, a Maryland Democrat, said yesterday on Bloomberg Television’s “Political Capital with Al Hunt.” He cited an amendment to the bill introduced by Michigan Democrat Gary Peters that would require large financial companies to repay any shortfall to the taxpayer-funded $700 billion Troubled Asset Relief Program.

“We’ll be working with the administration on how best to move it forward, but it is important that people understand that there is consensus on this idea,” Van Hollen said in a separate interview. “We have already had, essentially, a vote on this issue in the House.”

Obama on Jan. 14 announced plans to impose a levy on large financial firms, responding to public furor over reports of massive profits and “obscene” bonuses at companies that received taxpayer aid to weather the worst economic crisis since the Great Depression.

The fee, based on bank liabilities, would be imposed starting June 30 on financial companies with more than $50 billion in assets, including TARP beneficiaries Citigroup Inc., American International Group Inc. and Bank of America Corp.

“I think Congress will go along,” Van Hollen said. “There’s a real sense in Congress that it’s time for the banks to pay back the taxpayers.”

The Senate should include the provision in overhaul legislation being drafted by the Banking Committee, he said.

“You could amend the House provision to make it consistent with the administration’s proposal,” Van Hollen said.

FDIC Authority

Peters’s amendment gives the Federal Deposit Insurance Corp. the power to collect a fee from financial companies with more than $50 billion in assets and hedge funds with more than $10 billion. It builds on authority the FDIC would get under the House bill to charge those firms a fee to create a fund that would cover the cost of dismantling failed systemically risky firms.

The TARP legislation Congress approved in October 2008 required the president to submit a proposal to Congress in five years to recoup any projected taxpayer losses from the financial industry.

The Obama administration estimates that its proposed Financial Crisis Responsibility Fee would raise $90 billion over 10 years and $117 billion over 12 years.

House Republicans are organizing an effort in conjunction with the Chamber of Commerce to block the bank tax President Obama has proposed to recover lost bailout funds.

If Obama' proposal was equal parts policy and politics, the GOP support of the banks can only come as a welcome gesture. To be clear about what kind of backing the effort has, Rep. Peter King (R-N.Y.) splashes in bold across the top of the letter: "The U.S. Chamber of Commerce strongly supports this effort"

When Congress bailed out the banks, it included a provision to instruct the Treasury Department to make sure that all losses are recouped once the situation stabilized so that taxpayers didn't take a loss. Treasury Secretary Tim Geithner referenced that section in defending the bank fee before a congressional panel Wednesday.

King voted for the bailout, which includes section 134, "Recoupment."

The section "[r]equires that in 5 years, the President submit to the Congress a proposal that recoups from the financial industry any projected losses to the taxpayer.

"Upon the expiration of the 5-year period beginning upon the date of the enactment of this Act, the Director of the Office of Management and Budget, in consultation with the Director of the Congressional Budget Office, shall submit a report to the Congress on the net amount within the Troubled Asset Relief Program under this Act. In any case where there is a shortfall, the President shall submit a legislative proposal that recoups from the financial industry an amount equal to the shortfall in order to ensure that the Troubled Asset Relief Program does not add to the deficit or national debt."

King did not immediately return a phone call seeking comment.

The congressman's letter to his colleagues is below, followed by his proposed letter to the president.

Bank tax cost estimates

"...according to a report by Wisco Research LLC analyst Sean Ryan...

  • Bank of America, the largest U.S. lender, would owe $1.53 billion a year, or 18 cents a share
  • JPMorgan, the No. 2 U.S. bank, would owe $1.52 billion, or 38 cents a share
  • Citigroup would owe $1.37 billion, or 11 cents a share

"...Analyst Joseph Dickerson said

  • RBS could owe the U.S. nearly $1 billion and
  • Barclays, $5.6 billion
  • HSBC could see a bill of $3.8 billion

FDIC may raise assessments on riskier banks

Some of the largest U.S. banks would have to pay higher government fees under a proposal that federal regulators are considering to discourage risky behavior by big financial institutions.

The Federal Deposit Insurance Corp.'s five-member board approved a preliminary proposal Tuesday that would alter the way the agency assesses deposit-insurance fees for banks with more than $10 billion in assets.

Regulators would use new financial measures to gauge a bank's risk profile and how the bank would deal with financial stresses. Those determined to be more risky, or which would cost the FDIC more if they were to fail, would have to pay more to the government.

Additionally, the proposal would allow the FDIC to take a special look at "highly complex" financial institutions: those with more than $50 billion in assets and holding company assets of more than $500 billion. FDIC staff said these firms, which number less than 10, would be subject to additional risk evaluations given the nature of their business.

The proposed change wouldn't result in the FDIC receiving more money but would shift the burden for funding the deposit-insurance fund to riskier, large institutions. FDIC staff said if it had been in place at the end of 2009, roughly half of large banks would have paid higher fees, while the other half would have paid less.

FDIC Chairman Sheila Bair, discussing the proposal, said the goal was to collect additional fees from banks when they take on higher risks—usually during healthy economic times—rather than at times of economic stress.

"We've learned a lot from the crisis," Ms. Bair said, describing the proposal as "fairer and less pro-cyclical."

The response from banking groups was muted. James Chessen, chief economist at the American Bankers Association, said there was some uncertainty about the potential unintended consequences of the proposal, but that the FDIC's attempt to promote greater fairness in the way it charges for deposit insurance was positive.

"It's always a good thing when an insurer seeks to accurately assess risk," Mr. Chessen said. He suggested that it would remain to be seen whether the program actually changed the behavior of banks.

Tuesday's board approval means the proposal will be open for public comment for 60 days. FDIC staff will collect the comments and make adjustments to the proposal as necessary. The FDIC board would then have to vote again to move the process forward.

The board also voted Tuesday to extend its program providing unlimited deposit insurance for certain business accounts. FDIC staff has proposed extending the transaction account guarantee program through the end of 2010, with the discretion to extend the program for additional year if necessary. The program was set to expire at the end of June.

The proposed extension reflects the concern of regulators that the nation's smaller banks, which depend on deposits to fund their business, are still struggling in the wake of the financial crisis. Roughly 6,400 banks are taking advantage of the additional deposit insurance.

Global views of bank tax

Europe moves to levy bank failure tax

Europe is following the US in implementing financial reform

European Union finance ministers have agreed to establish a new framework for financial supervision, designed to help prevent future financial crises.

The measures include a European Systemic Risk Board to oversee the health of Europe's economy.

Ministers also approved a second instalment of emergency loans to Greece worth 9bn euros ($11.4bn; £7.5bn).

They were unable, however, to agree a new Europe-wide bank levy or bank transaction tax.

Other supervisory bodies that will oversee banking, financial markets, insurance and pensions were also agreed by the ministers.

They include the European Banking Authority, the European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority.

The Council of the European Union said the European Parliament "is expected" to ratify these bodies later this month. They will then become "operational as planned" from 1 January next year.

The framework had already been agreed in principle earlier this month.

EU Economic and Monetary Affairs Commissioner Olli Rehn said the new framework was necessary in light of the continued economic uncertainty in Europe.

"I think it is important to underline that while we have stabilised the situation in the spring and during the summer concerning financial stability in the euro area, we are not out of the woods yet."

Europe's move follows the sweeping Wall Street reforms that President Barack Obama signed into law in July.

Bank tax

France, Germany and the UK have already committed to introducing a bank levy, designed to cover the costs of any future financial crises.

Following the multi-billion-dollar bail-outs made by governments across the world in the wake of the financial crisis in 2008, the leaders of Europe's three biggest economies have argued strongly that taxpayers should not be expected to foot the bill for any future crises.

However, the ministers were unable to agree to a Europe-wide levy. They were also unable to agree to a tax on individual financial transactions.

UK Chancellor of the Exchequer George Osborne said: "It is very difficult to see how in practice you could make a transaction tax operate in a world in which capital markets and financial activity can move very quickly to jurisdictions outside the European Union."

German Finance Minister Wolfgang Schaeuble did not, however, dismiss the tax altogether: "My view remains that there is no certainty on this, but there is a chance [it will be introduced]".

Ministers said they would discuss both the bank levy and transaction tax again at an informal meeting in Brussels on 30 September and 1 October.

Basel chief says bank tax "premature"

Introducing a global levy on banks at this stage in the recovery of the financial markets would be too early, chairman of the Basel II Committee has claimed.

Nout Wellink, who is also head of the Dutch central bank, made the comments as part of an interview with the Financial Times.

He suggested that implementing a tax at this stage could potentially hamper the global economic recovery.

Mr Wellink told the news provider: “I'm not, by definition, against it, but I think it's premature.

“I doubt whether this is a good idea. It's born out of frustration. There are strong political motives behind it."

He added that global leaders should wait until recommendations by the Basel II Committee have been finalised before any further legislation is drawn up.

Proposals from the Basel Committee should go some way to stabilising the banking sector and preventing financial institutions from becoming too big to fail, the chairman explained.

In the interview he concluded that the introduction of a banking levy could reduce global economic growth by as much as one per cent during the next few years.

Measures the committee has recommended include increasing capital requirements and introducing minimum levels of liquidity.

G20 split on global tax on banks

G20 leaders have scrambled together a basic accord to toughen financial regulations, but the summit also sowed a fair degree of discord.

In general, countries whose banks survived the recent financial crisis are taking the view that they have already proven the worth of their regulatory frameworks and so aren't willing to pay the price for others' errors.

That left the world divided between crisis-battered US and Europe on one side and the rest of the world, comprising developing nations but also Canada and Australia, on the other.

Nowhere is this division clearer than in the debate over a Europe-backed plan to introduce a bank tax, a program that's aimed both at building up an insurance fund against future episodes of systemic risk and recouping the costs of fiscal stimulus measures and bank bailouts incurred after the 2008 crisis.

Proposals to establish a global tax on banks and charge them for the cost of government bailouts divided representatives of the Group of 20 countries during a summit meeting here on Friday.

The perilous fiscal condition of Greece and other countries in Europe, and the need for the world’s big economies to coordinate changes in financial regulation, were the other major topics in the daylong meetings of Group of 20 finance ministers and central bank governors.

“The global recovery has progressed better than previously anticipated, largely due to the G-20’s unprecedented and concerted policy effort,” the officials said in a joint communiqué.

The International Monetary Fund endorsed a proposal this week that would establish a tax on bank profits and on salaries paid to bank executives. Canada, whose banking system withstood the crisis, has led the opposition to the idea, while the Obama administration, which has called for a $90 billion levy to be collected over 10 years from banks that received bailout money, tried to marshal support for it.

“There was not agreement on a global bank tax,” Jim Flaherty, the Canadian finance minister, said at a news conference after the meetings. “Some countries are in favor of that. Some countries quite clearly are not. It depends whether a country has had to use taxpayers’ dollars to bail out banks, for the most part.”

Treasury Secretary Timothy F. Geithner defended the idea. “We’re trying to establish the basic principle that where governments are exposed to risk in putting out financial fires like this, that taxpayers don’t bear the costs of paying for those actions,” he said, adding, “That is a simple, fair, basic imperative.”

IMF to call for two banking taxes

I have in my possession a copy of the IMF's eagerly awaited paper for governments on how the banks should be made to pay for the costs of future financial and economic rescue packages.

And I have to say that the proposals - which have been sent to IMF members in the past few hours - are more radical than I anticipated.

In the paper called "A Fair and Substantial Contribution by the Financial Sector" PDF (which rather gives the game away), the IMF argues the case for two new levies to be applied in as many countries as possible:

1) A "financial stability contribution" to pay for "the fiscal cost of any future government support to the sector". The levy would be paid by all financial institutions, not just banks, initially at a flat rate but eventually refined so that riskier institutions paid more.

2) A "financial activities tax", which would be levied on the sum of financial institutions' profits and the remuneration they pay.

The proposals are likely to horrify banks, especially the proposed tax on pay.

They will also be politically explosive both domestically and internationally.

THE International Monetary Fund is expected to recommend an unprecedented new excess profits tax on banks worldwide.

The fund is expected to suggest the tax - which is effectively on banks' cash flow - as one of the best ways governments can raise significant amounts from banks without drastically distorting the financial system.

The tax will be announced alongside the Obama-style banking levy, which the IMF will also rubber-stamp in its report at its spring meetings this month.

The IMF was commissioned by the Group of 20 leading economies last year to investigate new taxes on banks.

Although most attention initially focused on so-called Tobin taxes, which levy small charges on banks' financial transactions (a model promoted by campaign groups as the Robin Hood Tax), the fund is likely to rule them out as a serious prospect. The move will frustrate Gordon Brown, who threw his weight behind the transactions tax in the early stages of the research.

Most had assumed that this would mean the fund would give its central recommendation to a form of balance sheet levy, which has already been implemented in Sweden, and which has been proposed by the Obama administration.

But the fund is also considering an equally important recommendation for a less well-known tax that simply levies a charge on bank profits, beyond a certain level.

The advantage of the balance sheet levy is that it should encourage banks not to build excessively large stocks of assets, as the Royal Bank of Scotland did before the crisis. The excess profits tax is thought to be the most efficient way to raise money from banks. In time, it could replace regular business taxes as the best way of generating revenue from financial institutions.

Michael Devereux, director of the Oxford University Centre for Business Taxation, said: Although this is effectively a tax on banks' cash flow, if I were the IMF, I would present it as an excess profits tax - additional to everything else and particular to banking because that is whom we would like to tax.

Unlike a balance sheet levy, it is not designed to change behaviour and stop them from doing silly things. It is a way of collecting money - the most efficient way we can do it.

The proposals, which the British government and the Conservatives have indicated they would adopt, could represent a revolution in the way banks, and wider businesses, are taxed in Britain.

Cash-flow taxes are not used elsewhere in the developed world, except for an obscure system in Belgium. In some ways, a cash-flow tax would be equivalent to VAT, since it would be levied broadly on bank activity.

Britain toyed with an excess profits tax during World War II, although the use of such a system in a specific industry would be unprecedented.

European senior officials continue meeting on bank taxation

MADRID — European Union finance ministers were working Saturday on ways to ensure tougher banking supervision, and considering a bank levy to pay for banks that collapse in the future, hoping to prevent a repeat of the recent financial crisis which cost governments billions of euros.

French Finance Minister Christine Lagarde told reporters late Friday that she wanted all major financial groups to pay a fee "on the basis of the riskiest activities that they conduct." "The riskier the activity, the more tax there would be," she said. "You could call it a tax on risk."

Any levy on banks to pay into a fund to rescue lenders in future crises would be set up individually by the EU's 27 nations as there is no widespread support for a bigger European fund.

Portugal's central banker Vitor Manuel Ribeiro Constancio — who will soon take up a post as the European Central Bank's vice-president — said any levy should be limited to paying for bank collapses and should not be used for other projects.

"If governments want to go ahead then this should be linked to deposit guarantee schemes and possibly only used for restructuring and resolution problems of the banking sector itself, not for other purposes," he told reporters before the Saturday meeting.

Poverty campaigners Oxfam and others are calling for a global tax on banks' financial transactions that they say could raise $400 billion a year to channel to poor countries.

Finance ministers or their deputies from Belgium, Ireland and Denmark were unable to travel to the two-day talks in Madrid after a volcanic ash cloud grounded most flights in northern Europe. France's Lagarde said she was unsure how she would return to Paris on Saturday after her flight was canceled.

"We might be stuck a while here," she said.

Estimates for the IMF "bank tax"

If the IMF really does want two big new levies on banks, we’d better run the numbers. The snap conclusion of most bank analysts is that the International Monetary Fund’s proposal for some shiny new financial stability taxes could be quite a large headache for the sector.

A ‘20 per cent sliced off 2011’s estimated pre-tax profits’ headache, to be precise.

Daniel Davies, a member of Jonathan Pierce’s team at Credit Suisse, arrived at this potential figure on Wednesday, after crunching the IMF’s numbers. The full CS note is in the Long Room.

The problem for banks, he argues, isn’t the hilariously-named ‘Financial Activity Tax’ (FAT – Ha, good one — not), so much as the Fund’s ‘Financial Stability Contribution’, the other big idea for fixing risky banking.

Here’s the IMF’s reasoning for a FSC, plus how it would work (emphasis in original):

"The direct fiscal costs of financial sector failures should be contained and covered by a “Financial Stability Contribution” (FSC) linked to a credible and effective resolution mechanism. The main component of this FSC would be a levy to provision for the net fiscal cost of direct support to the financial sector and help reduce excessive risk-taking; a second and smaller component would be a fee to pay for the availability of a credit line to ensure that the gross financing needs can be met even if the resources accumulated though the levy are insufficient. The first element could—but does not need to—feed a resolution fund that would put aside levies paid by the industry to cover the expected costs of resolutions of failed institutions. The second would go to general revenue. The rate of the FSC should be refined over time to reflect explicitly (systemic) risk. The FSC would ensure that the industry helps meet the costs of any potential resolution and would reduce systemic risk. If designed properly, resolution mechanisms will avoid governments in the future being forced to bail out institutions deemed too important, too big, or too interconnected to fail. The FSC could be supplemented, if needed, by a temporary ex post recovery charge."

Global senior officials conferring on taxation method

"...If banks are to enjoy even a small hint of implicit underwriting from the state, they should pay for it. None of us can get insurance for our homes or our businesses for free – we pay a premium for it. And so should banks. We need to re-examine an economic model that seems to work much better for investment banks than for businesses and workers.It is this challenge that a meeting I am chairing tomorrow is seeking to address. Together with senior officials from G7 finance ministries, the IMF, World Bank, the Financial Stability Board, and leading academics, the government will be exploring ways to shift the burden of financial sector support from the public to the private sector.

There are several options – among them a global insurance levy, the use of innovative contingent capital instruments developed in the UK, and a global transactions tax. But this problem can only be dealt with through global agreement, as we know all too well that banks can use gaps in regulation to game the system. We have seen that we are all vulnerable to the failures of firms in other nations, and we all benefit from the actions of national authorities to support their financial systems.

Finding a new way to keep taxpayers from shouldering the bill for future ­bailouts will be far from easy, but the UK will continue to lead the ­international effort to do so. A global agreement on this issue would be the most important legacy of our response to this crisis, and it is a prize all governments have a duty to pursue."

UK approves bank levy

The British Treasury has published details of the new banking levy it is introducing in the financial sector.

Chancellor George Osborne sketched out the proposal in his comprehensive spending review statement yesterday (October 20th 2010), which detailed £81 billion ($127 billion) worth of cuts from public services in the UK that are scheduled to take place over the course of the next four years.

He said that it was important for the maximum tax revenues to be taken from British banks, with the public being asked to accept the tough measures that will see almost 500,000 jobs lost in the public sector.

Details of how the new banking tax will work have now been released, with the levy set to be based on the size of financial institutions' balance sheets, reports BBC News.

The final rate of the levy is yet to be confirmed, but banks have been told that it will not exceed 0.1 per cent.

Documents released in June on the proposals suggested that the levy would be introduced at 0.04 per cent initially, rising to 0.07 per cent after its first year of operation.

Certain items contained on balance sheets, such as bank capital and retail deposits covered by insurance, will be exempt from the tax.

Mark Hoban, financial secretary to the Treasury, said there are two key aims underlining the legislation.

"Firstly, ensuring that banks make a fair contribution in respect of the potential risks they pose to the UK financial system and wider economy," he stated.

"Secondly, the final scheme design incentivises banks to make greater use of more stable financial sources, such as long term debt and equity."

It is hoped that the tax will raise around £2.5 billion a year.

The Fitch ratings agency has said that the UK should be able to maintain its triple A credit rating as a result of the measures outlined by Mr Osborne yesterday.

Merkel favors "transaction tax"

The Group of 20 economic powers needs to develop a set of rules to prevent banks becoming so big that they can hold governments to ransom, German Chancellor Angela Merkel said on Wednesday.

“This year is about implementing the regulations that have been agreed during the G20 process,” Merkel told parliament during a budget debate.

“It is also about finding further regulations, and that applies especially for the G20 meetings … to find ways to prevent banks becoming so big or so complex that they can hold us to ransom again,” she added.

“There are different models and Germany will go into the debate with one such model,” she said.

Canada will host a G20 summit in June.

German Finance Minister Wolfgang Schaeuble said on Tuesday he saw growing signs of achieving a possible international agreement on measures to tackle the banking sector.

Germany has said it is not planning a special charge for banks after U.S. President Barack Obama proposed a fee for Wall Street banks to reimburse taxpayers for bailing them out.

Instead, Merkel has said she could imagine an international financial transaction tax.

Merkel told parliament it was also important that exit strategies from economic stimulus measures were agreed internationally.

German banks to pay into financial protection fund

The German government has approved plans to make banks pay into a fund to cover the costs of future financial bail-outs. The so-called "stability levy", which is expected to raise about 1.2bn euros (£1bn), will be closely watched by other countries considering such moves.

Germany's finance minister, Wolfgang Schaeuble, expects to draw up the legislation by the summer.

Critics dismissed the levy as a bid to win favour ahead of regional elections.

Bundesbank chief opposes limiting bank size and activities

FINANCIAL REGULATION should be strengthened by improving existing rules on how much capital banks must hold rather than by capping the size of banks or setting up bailout funds, the head of the German Bundesbank has said.

Speaking at Trinity College Dublin, Dr Axel Weber, a member of the European Central Bank’s governing council, criticised US plans to limit the risky activities of banks and to cap the size of the institutions. The plans would be “the most severe intervention” by a regulator in the sector, he said.

Such a move could lead to an unregulated “shadow banking” system where riskier investment banking, hedge funds and private equity firms’ activities would be forced outside regulated banking.

“Whether the resilience of the system at all is improved by that, I have some doubts,” he said, addressing the Financial Services Ireland (FSI) annual lunch.

“It could actually be that all the risky business takes place outside the regulated sector, and then we would kid ourselves and be under a false sense of security.”

A “much better” option would be to force banks to hold more capital by improving existing Basel rules, said Dr Weber. Discussions on the exact level of capital to be held by banks would be concluded by the end of the year, he said. “The key is to promote a more resilient banking sector by raising the level, the quality, the consistency and transparency of capital.”

Retail or “utility” banks may not have to hold as much capital, as they do not engage in risky investment activities, he said, while systemically important banks should have to hold “a capital surcharge”.

“It would make it less attractive for banks to become systemic, so you would put a brake on the growth of the balance sheets.”

Dr Weber said he was “not that keen” on a bailout fund for troubled banks, as it would not solve the problem of moral hazard – where banks act differently as they are not fully exposed to risks they assume, because they will be bailed out. Such funds “are never large enough”, he said, and the taxpayer is then forced to intervene, increasing the risk of moral hazard.

Most governments are under pressure to introduce a tax or levy on banks to force them to pay for the cost of the crisis, he said.

“Governments strongly want to go in the direction of such a tax – I think quite rightly that it will come as an ex poste instrument to deal with the cost of the next crisis.”

UK's Osborne said to plan bank tax

U.K. Chancellor of the Exchequer George Osborne is pushing ahead with plans to tax banks in his first budget, according to three people with knowledge of the plans, an announcement to go along with spending cuts that may prompt forecasters to lower economic-growth estimates.

The tax, which may be imposed on assets or liabilities, could raise at least 2 billion pounds ($3 billion), one of the people said. Osborne has said the June 22 budget statement would set the stage for the deepest spending reductions since the 1980s.

The bank-tax announcement would come days before Osborne and Prime Minister David Cameron travel to Toronto to meet Group of 20 leaders. G-20 finance ministers this month declined to endorse a global bank tax, while the U.S. and European governments said they would introduce some levy on lenders.

“This is something we have said we would like international agreement on but will go ahead in any event with our bank levy,” Cameron told reporters in Brussels on June 17.

The Treasury has already reaped benefits from taxing banks, as a one-off tax on bank bonuses introduced last year by Osborne’s predecessor, Alistair Darling, raised 2.5 billion pounds.

UK's Darling says bank tax ‘more likely than before’

An international levy to fund the cost of bank bailouts is more likely to be introduced now than it was six months ago, the UK’s chancellor of the exchequer has claimed.

Alistair Darling made the comments while speaking to the Commons Treasury Committee in London.

He explained that a global bill needs to be implemented, otherwise bankers and financial institutions will move location to avoid being forced to pay.

The politician was quoted by the Wall Street Journal as saying: “I'm more optimistic now that we can get an international levy or tax than I was six months ago.”

He added: “You would have to have the US and ourselves on board [for a agreement to be made]. Our financial centres are by far the biggest in the world."

The chancellor’s comment are at odds with the views of the Conservative Party, which claimed it would introduce a levy on bankers regardless of whether global backing was available.

Conservative leader David Cameron recently announced that the party would introduce a US-style tax on banks operating in the UK if they were to win the forthcoming general election.

UK's Brown says global bank tax near

Gordon Brown said on Wednesday the world’s leading economies were close to agreeing a global bank tax, amid hopes in Downing Street that a deal can be concluded at the G20 summit in Canada in June.

Mr Brown believes that opinion has shifted decisively in favour of a globally co-ordinated tax after President Barack Obama’s move last month to raise $90bn (£57.7bn) from a US bank levy.

The tax could cost the financial services sector tens of billions of pounds a year.

The prime minister has strongly advocated some kind of charge on banks. “I’m interested in the way support is building up for international action,” he said in an interview with the Financial Times.

Last year, Mr Brown mooted a tax on bank transactions – a so-called Tobin tax – as one of a number of options to make sure the “contribution banks make to society is properly captured”.

The US immediately shot down that option, but the International Monetary Fund has been looking at other ideas.

Mr Brown believes that the IMF will endorse a global bank levy before its April meeting in Washington.

Downing Street hopes an agreement in principle can then be agreed by world leaders at the G20 summit in June, although the implementation of the levy and the detail of how it would work could take longer.

“People are now prepared to consider the best mechanism by which a levy could be raised,” Mr Brown said.

He thought the IMF would propose a method that would be “somewhat different” from the tax on wholesale funding proposed by Mr Obama.

UK’s Myners calls for global debate on bank levy

Britain’s financial services minister Paul Myners said on Monday he wanted to promote a global debate on how to protect taxpayers from future investment bank failures and warned banks against paying big bonuses.

Myners will host a meeting of representatives from the G7, the World Bank and the IMF in London on January 25 during which an American-style insurance levy on financial institutions will be discussed in an attempt to avoid costly bailouts in the event of another crisis.

“We want to promote a global debate about this,” he told BBC radio.

“Gordon Brown made a very good speech at the G20 finance ministers’ meeting in St Andrews in November which we then followed up in the Treasury with a publication of a document setting out a number of ways in which the implicit guarantee could be internalised by the banks through a transaction tax, or through some form of deposit levy.”

He said the government was looking at the “very broad principles” because international cooperation would be needed.

The opposition Conservative Party, on course to win a national election due to be held before June, has said it is in favour of an insurance levy scheme as long as the Group of 20 group of developed and emerging nations agreed to it.

Myners said Britain had gone further than any other country in trying to tackle bank bonuses, including a one-off tax.

He said it was having an impact, but was unable to say how much money the tax would raise, or how big the bonus pool would be this year after exceptionally strong profit performances.

“We expect remuneration committees of these boards, who are the final arbiters, to look very carefully at what drove the profits and how much should be rewarded for talent and how much should be retained to support for lending for the future,” he said.

Canada fight global bank tax

Cabinet ministers from Canada’s Conservative government fanned out across the world on Tuesday to lobby against proposals for a global tax to cover the cost of bank bailouts.

Such a plan is being championed by both the Obama administration and the International Monetary Fund. But at a meeting of the Group of 20 finance ministers and central bank governors last month, Canada led the opposition to the plan. Tuesday’s move by Canada, which will be the host of the Group of 20 heads of state meeting in Toronto next month, appeared to be an attempt to create an alliance against the tax.

Since Canada’s banks were largely unaffected by the banking crisis of 2008, the Canadian government argues that any tax would unfairly penalize them. Senior Canadian cabinet ministers spoke out against the plan during speeches in Washington, Shanghai and Mumbai as well as at a news conference in Ottawa.

“We’re not against international cooperation,” Tony Clement, the industry minister, said in an interview. “We’re against this particular bank tax because it creates moral hazard.”

Since 2008, the Conservative government in Canada has championed tight regulation, a position it had not previously expressed. A comparatively strict regulatory structure played a role in protecting Canada’s banking system, although some economists argue the country’s banking oligopoly and its conservative bank managers may have been more important contributors.

In place of a tax, Canada is proposing that banks be required to hold a special kind of debt that could be readily transformed into equity when reserve funds run low. Critics, however, argue that the act of converting such debt to reserves could in itself start a banking panic.

Goldman estimates minimal impact on Euro bank US operations

It's been nearly 24 hours since US president Barack Obama unleashed details of his bank levy on Wall Street. That means we are starting to get some estimates from analysts on the cost of the tax, which would begin on June 30, 2010, and is based on a percentage of banks' liabilities less insured deposits.

The FCRT, aimed at recouping bailout monies from US banks, applies to financial companies with more than $50bn in assets, but intriguingly, also affects foreign banks with significant US subsidiaries.

Here are some rough numbers from Evolution Securities:

So that's the levy resulting in a cost of £383m for RBS, based on 2009 figures, for example. Barclays Capital, meanwhile, would be hit by £594m, while Credit Suisse would get a €573m figure.

As FT Alphaville noted yesterday, these aren't hefty numbers by any means, and Europe's banks are certainly less-affected than their US counterparts since all of American banks' liabilities are subject to the fee, while just a portion of European banks' ones are (i.e. US-based liabilities only).

And it looks like the impact for European banks could well turn out to be lower, as they do things like (gasp) reduce their operations in the US or (horror) turn to off-balance sheet vehicles to decrease their liabilities.

The analysts at Goldman Sachs, for instance, are predicting FCRT will impact normalised 2011 profits for Europe's investment banks by just four to six per cent (see below table). In fact. they haven't even bothered incorporating that cost into their "estimates, due to the many mitigants which are likely to absorb some of the hit."

Those changes being: We can think of a number of mitigants with scope to reduce the impact, specifically:

(1) TARP losses may fall. The estimated cost of TARP has reduced to US$117 bn and may change further. The tax is meant to recoup TARP expenses so presumably if the total falls, the tax would fall as well. (2) Asset/product repricing. Some – or all – of the tax would likely be passed on to end users of bank services. (3) Balance sheet management. European investment banks operating in the US should have a comparatively high level of flexibility in changing geographical locations for select businesses.

FDIC's Bair says in favor of bank tax

FDIC Chairman Sheila Bair told CNBC Monday that she supports placing a tax on large financial institutions that would shield taxpayers in the event of another bank failure, pinning any financial liabilities on shareholders and creditors instead.

"It's not a bailout fund, as someone said, it's really a taxpayer protection fund," Bair said. "It will set up a mechanism going forward that doesn't put the taxpayer at any risk for resolving one of these very large entities if they get in trouble again."

Earlier Monday, The Wall Street Journal reported that governments in both the US and in Europe are moving closer to a decision to tax large banks.

Bair also said she expects souring commercial real estate loans to drive a slightly higher number of bank failures in 2010 than the 140 that occurred last year, with the peak coming in the third quarter. But toward the end of the year, she said, the industry will start to stabilize.

Bair reconfirmed her assessment that small to mid-sized banks will struggle more than the larger financial institutions this year because of their concentration in the commercial real estate market. But she's not worried about a blowup in commercial real estate, she said, though "there's still a lot of losses there."

Bair emphasized that a banking recovery typically lags economic recovery, as it takes some time for credit losses to work through the system. But in the event of a double-dip recovery, she said the FDIC's funds would still be in "pretty good shape."

Tribe says bank tax plan `constitutionally invulnerable'

Laurence Tribe, a Harvard University Law School constitutional law professor, talks with Bloomberg’s Betty Liu about Wall Street’s decision to hire a Supreme Court lawyer to examine President Barack Obama’s plan to tax banks. Tribe also discusses the implications of the bank arguments opposing the proposed tax, limits on taxation and legal precedents that support the Obama plan.

SIFMA hires top lawyer to challenge bank tax

Wall Street’s decision to hire a Supreme Court lawyer to study President Obama’s plan to tax banks may be aimed more at swaying lawmakers than winning a lawsuit, some constitutional experts said.

Challenging the Obama plan in court “would be a fool’s errand for the banking industry,” said Bruce Fein, a Washington-based legal scholar and former associate deputy attorney general in the Reagan administration. “But they might get Congress nervous, so maybe the levy wouldn’t be as heavy.”

The Securities Industry and Financial Markets Association, responding to a proposal that analysts say may cost JPMorgan Chase & Co. and Bank of America Corp. more than $1.5 billion each a year, hired Carter Phillips, 57, of Sidley Austin LLP, Sifma spokesman Andrew DeSouza said yesterday.

The Washington lawyer, who has argued 66 cases before the nation’s top court since serving as a 25-year-old clerk for former Chief Justice Warren E. Burger, will study the plan and help determine whether to attempt a suit. Sifma hasn’t decided on “any potential actions beyond opposing the proposal itself as both punitive and counterproductive to increasing lending to support the economic recovery,” DeSouza said.

“We still have not seen the proposed language and we are just getting started on the analysis,” Phillips wrote in an e- mail saying that he couldn’t comment further. The New York Times reported Sifma’s decision to hire Phillips yesterday.

Naming Names

The banks could try to argue in a lawsuit that a law imposing a bank tax would be a so-called bill of attainder, or measure that singles out a certain person or group without due process, said David Rivkin, a Washington lawyer at Baker & Hostetler LLP.

“It would be a difficult argument, but not unreasonable,” Rivkin said. Even so, “It’s important to push back early and aggressively,” he said.

Congress probably won’t face a legal challenge writing a bank tax as long as it doesn’t name individual companies or target a small group, said Jonathan Adler, a professor at Case Western Reserve University School of Law in Cleveland.

“If you put that you want X dollars from a particular bank and mention it by name, that could pose a problem,” Adler said.

Few such actions are tried, said Joseph Bankman, a professor at Stanford Law School in Stanford, California. In 2002, a federal appeals court ruled that Consolidated Edison, owner of New York City’s biggest utility, couldn’t be singled out for punishment by a law forbidding it to cover costs.

‘Long Shot’

“It’s a long shot,” Bankman said. “But a lot of people bring long shots if a lot of money is at stake.”

Sifma’s decision is a challenge to President Barack Obama, who said when he unveiled the plan Jan. 14 that banks should consider “simply meeting their responsibilities” instead of “sending a phalanx of lobbyists to fight this proposal.” The fee, based on bank liabilities, would be imposed starting June 30 on financial companies with more than $50 billion in assets, a category that would also include Citigroup Inc.

The president is responding to public and political furor over plans by the biggest beneficiaries of the $700 billion Troubled Asset Relief Program to hand out billions of dollars in bonuses for 2009. Goldman Sachs Group Inc., Morgan Stanley and JPMorgan’s investment bank, all based in New York, may hand out $27.6 billion in bonuses, according to analysts’ estimates. That’s 49 percent higher than a year ago, more than the previous high of $26.8 billion in 2007 and less than some analysts expected in October.

Senate Fight Seen

The administration’s plan may fail in the Senate, according to FBR Capital Markets analysts led by Paul Miller.

“The proposal has a higher probability of passage in the more populist-driven House,” the Arlington, Virginia-based analysts wrote in a note to investors last week.

Under the proposal, Charlotte, North Carolina-based Bank of America, the biggest U.S. lender, would owe $1.53 billion a year, or 18 cents a share, while New York-based JPMorgan, the No. 2 U.S. bank, would owe $1.52 billion, or 38 cents a share, according to a Jan. 14 report by Wisco Research LLC analyst Sean Ryan. The tax would amount to 22 percent of Bank of America’s expected 2010 earnings per share and 12 percent of JPMorgan’s, he wrote.

New York-based Citigroup would owe $1.37 billion, or 11 cents a share, while Goldman Sachs would owe $1.16 billion, or $2.01 a share, Ryan estimated.

Volcker on proposed tax

"...Obama’s proposed tax on financial firms to recoup costs of the bank bailout program won’t place an undue burden on lenders, Volcker said.

“It’s not unfair to say that these big institutions that have benefited one way or another have got to carry part of that burden,” Volcker said. “It’s just a question of how we do it.”

Obama proposed a fee on financial companies with assets greater than $50 billion aimed at getting back “every single dime” that taxpayers put into the bailout. The administration estimates the levy could raise $117 billion in 12 years from firms such as Bank of America Corp., JPMorgan Chase & Co., and Citigroup Inc..."

Boone and Johnson on the bank tax

"The last few weeks of political developments around the American-European financial system make us feel like we are back in the USSR. During the final years of communism’s decline, Soviet bureaucrats argued for futile tweaks to laws that would crack down on speculators and close “loopholes” – all in the vain hope they could keep the unproductive system of incentives intact. The US, UK and key European countries are now making the same errors. Rather than recognising the dangerous systemic failures in our financial system, their leaders are proposing bandages that can – at best – only postpone another, possibly much larger, meltdown.

There is growing recognition that our financial system is running a doomsday cycle. Whenever it fails, we rely on lax money and fiscal policies to bail it out. This response teaches the financial sector a simple lesson: take large gambles to get paid handsomely, and don’t worry about the costs – they will be paid by taxpayers (through fiscal bail-outs), savers (through interest rates cut to zero), and many workers (through lost jobs). Our financial system is thus resurrected to gamble again – and to fail again. Such cycles have been manifest at least since the 1970s and they are getting larger. This danger has even been recognised at the Bank of England, where Andrew Haldane, responsible for financial stability, recently published an eloquent critique of what he calls our “doom loop”.

Not surprisingly, Ben Bernanke, chairman of the Federal Reserve, does not agree that blame rests squarely with our monetary authorities. In a speech in Atlanta, he (incredibly) argued that extremely low interest rates on his watch – and decades of similar bail-outs of the financial sector – did not play a role in the recent collapse. Like an old-time Soviet bureaucrat, he put the blame on bad regulators and argued that more complex rules are needed to make regulation “better and smarter”.

When the Soviet Union fell apart, there were two competing views on what needed to be done: total change or tinkering. The establishment wanted tinkering – it felt much less threatening. This elite believed that if they could just get the rules right, the system would work well. But they completely missed the larger point – egregious loopholes in the rules were inherent to the system failing. In the Soviet Union then and in the US today, powerful lobbies profit from avoiding the rules, and a complex regulatory system actually serves them well as top lawyers and accountants seek out new flaws, or ensure they are represented in reform discussions. It is no surprise that Basel bank capital rules are discredited – the proposed Basel revision, with complex additional liquidity and risk-measuring systems, will fail just as surely.

This week, the US Treasury pulled its latest rabbit out of the hat: a tax on the liabilities of large banks. The Obama administration argues that, by penalising large institutions with such taxes, we can limit their future risk-taking. This logic is deeply flawed. Why would higher funding costs mean you gamble less? If you know Tim Geithner is waiting to bail you out, you may gamble more heavily in order to pay the tax. The UK “reforms” look equally unpromising.

In this regard, America’s top bankers appear much more honest, and focused on clear goals, than our policymakers. In his testimony to the Financial Crisis Inquiry Commission last week, Jamie Dimon, head of JPMorgan Chase, argued that regulatory failure was a major reason for our latest financial collapse. He did not try to argue that we could make it work – he just made the obvious point that, if there is potential failure to exploit, banks will naturally press any advantage to make profits.

For our top bankers, the fact that the system will only change marginally is fine. Phil Angelides, chair of the Commission, nailed Lloyd Blankfein, head of Goldman Sachs, with a metaphor for the age: Wall Street is in effect selling cars with faulty brakes, and then taking out insurance on the buyers. Blankfein naturally retorted: “I do not think the behaviour is improper.” Here we go again.

To end the doomsday cycle and prevent even greater damage to the real economy, we need dramatic reforms.

First, we must sharply raise capital requirements at leveraged institutions, so shareholders rather than regulators play the leading role in making sure their money is used sensibly. This means tripling capital requirements so banks hold at least 20-25 per cent of assets in core capital.

Second, we need to end the political need to bail out every institution that fails. This can be helped by putting strict limits on the size of institutions, and forcing our largest banks, including the likes of Goldman Sachs and Barclays, to become much smaller.

When the Soviet Union disintegrated, it took tough leaders and clear thinkers, such as Boris Yeltsin and Yegor Gaidar, to pick up the pieces and push for reform. It would have been easier and less messy if genuine reform had started before the collapse.

In the past few months it has become clear the US and UK don’t have sufficiently strong political leaders. There are good tough people around: Paul Volcker stands out in the US, as so does Thomas Hoenig, head of the Kansas City Fed, and Mr Angelides. In the UK, Lord Turner, Mr Haldane, and even Mervyn King are showing at least intellectual inclination towards more serious reform.

Let’s bring more such clear thinking into top policy circles now, rather than wait for another collapse.

Peston on the bank tax

"President Obama's levy on bank leverage or wholesale funding - and the way he explicitly linked it to the "obscene" (his word) bonuses being paid by banks - has surprised European ministers, central bankers and regulators.

They note that it was America which was most reluctant to agree global rules on how bonuses should be paid in recent negotiations between the heads of the G20 leading economies.

What's more, although the US is implementing the new rules - ordaining that bonuses should be paid largely in shares, released to recipients in tranches over a few years and subject to clawback for poor future performance - it is doing so a year later than everyone else (so for next year's bonus round, not this one).

Maybe it was just the proximity of the bonus announcements which persuaded the president that he had to signal his displeasure with the magnificent size of bankers' rewards.

According to calculations by the Wall Street Journal, 38 big US banks and securities firms are likely to pay their employees a record $145bn for their performance in 2009.

That's almost a fifth higher than 2008's haul and even more than in the boom boom year of 2007.

Now not all of that is bonus. But bonuses are back - and big.

At just three leading investment banks, Goldman Sachs, JP Morgan and Morgan Stanley, aggregate bonuses will in aggregate nudge $30bn.


That crisis in banking, when almost all banks were on the verge of collapse, was it just a dream?

President Obama probably doesn't have to worry about whether his bank levy is intellectually coherent: bashing bonus-bulging bankers probably won't alienate many US citizens.

That said, as I mentioned yesterday, there is a logic to the tax.

For those who complain that the big US banks have largely repaid the funds they received from taxpayers, with interest, there are two responses.

First that the massive costs of bailing out AIG were in large part the costs of protecting the banks from the huge losses they would have suffered if AIG had reneged on its enormous financial contracts with them.

So - arguably - it's reasonable that the banks should be asked to pay back what taxpayers have lost on AIG.

But perhaps more importantly, the taxpayers' guarantee to the biggest banks, that they won't be allowed to fail, is worth a great deal to them.

Why should they alone - of all the businesses and industries in the world - have that catastrophe insurance for free?

The logic of Obama's levy would probably be more compelling if this retrospective 12-year tax to raise just under $120bn were made permanent and were adopted by other countries.

Obama says he wants his money back for the cost of the last bailout. But arguably it is more important that banks pay an explicit fee for their protection by taxpayers against future failure.

As it happens, the International Monetary Fund has been asked by the G20 to examine how banks can best contribute to the costs of insuring them against failure.

There can be little doubt that it will have more confidence to make bolder recommendations in the wake of Obama's impost.

It will be fascinating to see how the British government reacts.

Ministers are doubtless mightily relieved that their one-off super-tax on bonuses no longer looks like a serious threat to the competitive position of the City of London.

America's taxation leapfrog provides both the Labour administration and Tory opposition with an interesting dilemma: at a time when the money is painfully tight for the public sector, they could whack yet another tax on the banks; or they could eschew such a move, to reinforce the City and financial services.

Oh dear, I see you smirking.

On the basis of the popular mood and the recent behaviour of politicians, any smart banker will bet huge that bank taxes are still firmly on a rising trend."

Pearlstein on bank tax

"...Thursday, the president took pains to deny that his proposed fee was in any way a "punishment" for the banks, but the rest of his rhetoric suggested otherwise. He framed the fee as a repayment to the taxpayers for losses sustained under the Treasury's rescue program, conveniently overlooking the fact that virtually all of the loss is likely to come from two bankrupt auto companies, an insolvent insurer and two government-sponsored mortgage finance companies.

The more intellectually honest approach would have been for the president to avoid the questions of cost and culpability and support the idea of a small tax on every financial transaction. This is an old idea that European leaders took up last fall and in the past was embraced by none other than Larry Summers, who is now Obama's top economic adviser.

Since it would be imposed on every trade involving every instrument and every type of financial institution, the transaction tax is a much fairer way of raising funds for broad-based financial rescues. And it has the added advantage of discouraging the kind of speculative high-frequency trading that has come to dominate Wall Street and generate most of its profits. A transaction tax could raise $50 billion to $100 billion a year -- more than enough to create a permanent financial rescue fund, with plenty left over for other uses, such as financing new infrastructure or reducing the federal deficit.

The blame game for the financial crisis has been going on for two years now, and it is getting tiresome. The money's long since been lost, the first crop of books has already been published, and regulators are well along in hammering out new rules to make sure it doesn't happen again. For the rest of us, the best approach to Wall Street might be to simply ignore it and turn our attention to those parts of the economy that can create real economic value and broadly shared prosperity."

Diamond and Kashyap on the bank tax

WALL STREET is considering legal action to prevent President Obama from imposing a new tax on bailed-out financial institutions. Because the law that created the Troubled Asset Relief Program compels the government to recoup the bailout money, it’s unlikely that banks will succeed in avoiding recompense. So rather than debate the constitutionality of the proposed tax, it is far more productive to design the best possible repayment plan.

The consequences of getting this right are huge: with a new tax, the administration aims to raise $90 billion over the next 10 years, which would do much to offset TARP’s estimated $117 billion losses. We therefore suggest taxing banks based on the difference between their assets at the end of August 2008 and their current level of capital. After all, the support these firms received was based on the size of assets before the financial panic began, not the size of those assets today.

With the bailout money, the government wound up insuring the bondholders and other creditors of the financial institutions. The tax we propose would allow the government to effectively collect insurance premiums now that should have been charged ahead of time. (Thus it exempts insurance companies and others that were not bailed out.)

Commercial banks might complain that they already pay a fee to the Federal Deposit Insurance Corporation, making the new fee a double tax. That is partly correct, but the deposit insurance they paid for was underpriced. As a compromise, however, we suggest that the current year’s deposit insurance payments be deducted from the new tax payments.

Because our version of the tax would require each firm to pay a tax proportionate to the size of its bailout, it would fall hardest on the former investment banks whose very survival was in doubt before the government stepped in. These firms are now making eye-popping profits and are on a path to pay record bonuses, but more importantly they had the most borrowed money that wound up being unexpectedly insured. This is why they ought to pay more.

Even TARP recipients that have repaid the bailout funds benefited from the stability the government provided, so they too would have to pay some portion of the tax. But our formula would lower the tax for organizations that have raised capital after August 2008 and would lower it further if they raise more. Regulators around the world have announced a preference for having banks raise more capital, and our tax has the advantage of reinforcing this goal.

By focusing on each institution’s assets before the fall of Lehman Brothers almost brought down the system, our plan would make it impossible for banks to shrink their way out of the tax. Since the crisis, banks have been reluctant to take on more risk and lend; some have responded to losses by selling assets and not renewing loans, which has only exacerbated the economic downturn. Our approach would remove the incentive for such behavior because it ties the tax to the size of the firms when the government guarantees were so valuable.

Likewise, by focusing on the historical size of a bank, our plan would allow little room to engage in sham accounting transactions to sidestep the tax. As we saw in the time leading up to the crisis, banks created many legally separate companies — the infamous “special purpose vehicles” — to buy certain assets without having to put up the bank’s capital to support them. If the banks had bought the assets directly they would have been required to hold more capital.

By August 2008, these tricks had been exposed; financial institutions can’t retroactively cover such vehicles back up, or make themselves seem smaller than we know they were. Nor should they be able to avoid the tax by inventing any new tricks to change the appearance of their current size.

It is generally a bad idea to enact after-the-fact penalties. But giving away free insurance, as the government did during the bailout, is also bad. Our tax would merely ask financial institutions to finally pay for the insurance policy that kept them afloat.

Buffett opposes bank tax

Warren Buffett opposes President Barack Obama’s proposed levy on financial institutions because firms including Goldman Sachs Group Inc. and Wells Fargo & Co. already repaid bailout funds.

“I don’t see any reason why they should be paying a special tax,” said Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc., in an interview on Bloomberg Television today. Supporters of the plan to tax the banks “are trying to punish people,” he said. “I don’t see the rationale for it.”

Obama announced a plan last week to impose a fee on as many as 50 major financial companies to cover as much as $117 billion in losses from the federal government’s Troubled Asset Relief Program. The levy would apply to firms with more than $50 billion in assets and would exclude Fannie Mae and Freddie Mac, the government-sponsored mortgage lenders that had to be taken over by the U.S.

“Look at the damage Fannie and Freddie caused, and they were run by the Congress,” Buffett said. “Should they have a special tax on congressmen because they let this thing happen to Freddie and Fannie? I don’t think so.”

Berkshire has investments in Wells Fargo and Goldman Sachs, which have repaid their bailout funds. Bank of America Corp. and JPMorgan Chase & Co. were also among the biggest beneficiaries of bailout funds, and both repaid their rescues.

“Most of the banks didn’t need to be saved,” Buffett said. “Including Wells Fargo.”

New York Times supports the bank tax

"We suspect most Americans would be baffled to realize that bankers see themselves as victims of the Obama administration’s financial policies. But there you go.

Irate at the administration’s decision to impose a fee on the largest banks, the bank lobby has hired a top lawyer to challenge the levy all the way up to the Supreme Court. Their case seems to rest on the perplexing argument that the fee would amount to a bill of attainder, which singles out a specific group of people and violates their right to due process. But the levy is aimed at a class — very large financial institutions. There are other taxes, fines and fees that operate in the same sort of way.

The push-back against the fee underscores bankers’ peculiar sense of entitlement. They feel entitled to the public support dished out by the Treasury, the F.D.I.C. and the Federal Reserve. Yet they do not believe they should be made to contribute toward the effort to save the economy from their reckless behavior.

President Obama articulated the fee as a way to recover the $117 billion cost of the direct financial bailout. It would apply to financial institutions with more than $50 billion in assets. (Bank of America, the country’s largest bank, would have to pay about $1.5 billion a year.)

Mr. Obama could have gone further. Government assistance to the banks went far beyond the Treasury’s bailout — large guarantees from the F.D.I.C., copious lending from the Federal Reserve, extremely low interest rates. And the damage caused by the banks exceeded $117 billion by an order of magnitude.

A levy on big banks’ assets could also be seen as a way to slow the further consolidation of a banking system that already has too many banks considered too big to fail. It fits the administration’s avowed interest in limiting the size of commercial banks by tightening limits on their market shares. In any case, having spent trillions to drag the economy back from the brink of the abyss, the government needs the money.

And the money is there. Goldman Sachs said last week that it would set aside 35.8 percent of last year’s revenue to pay bonuses. That is down from the 48 percent Goldman doled out for bonuses in 2008. But it adds up to an obscene $16.2 billion, more than 10 times what the proposed levy is expected to cost the bank each year.

Bankers would do well to stop trying to avoid this fee, and they should stop trying to block broad-based reforms intended to create a more solid financial system.

Increasing the cost of wholesale funding

"As taxes go — particularly ones sketched out on the back of a fag packet — the Obama levy on US-based banks is rather a good one. Certainly better than our half-baked tax on bonuses.

It seems entirely fair that banks should pay the US taxpayers’ bill for bailing out the financial system. This support not only saved the banks but is now ensuring that many are making bumper profits.

But which banks should pick up the tab? As I pointed out earlier this week, a levy based on banks’ total liabilities — as was originally mooted — would fall heavily on those banks with large retail deposits. Yet these banks were, on the whole, the least to blame for the crisis. The problems were caused by those institutions, such as Lehman Brothers and Northern Rock, that were more reliant on funding from the wholesale markets. It would seem fairer if the levy was tied to wholesale funding.

And that, essentially, is exactly what the Obama Administration announced yesterday. By excluding insured retail deposits, the 0.15 per cent levy on liabilities is focused on wholesale funding. This means that the likes of Goldman Sachs will be hit hard — some analysts estimate its tax bill next year could be 7 per cent of earnings — whereas purely retail banks will largely escape.

Foreign banks will also be caught with analysts at Morgan Stanley calculating that the tax would cut Barclays’ earnings by 4 per cent next year and HSBC’s by 2 per cent. The hit for RBS is more difficult to estimate but is likely to be relatively smaller. Share prices have reacted calmly, perhaps because investors are expecting it be watered down. Opponents will be able to point to a bill of $2 billion for Citigroup, which is hardly going to help the troubled giant to step up lending.

But the politics of the tax are attractive. The economics stacks up too. One of the best arguments for the levy is that it makes the price of wholesale funding more accurately reflect the real risks involved.

As Anatole Kaletsky argued earlier this week, the fact is that, in certain circumstances, all banks will be too big to fail. Lenders to banks will know they are likely to be bailed out if it all goes pear-shaped, which means they will be prepared to lend more cheaply than they would otherwise.

By increasing the price of wholesale funding to the banks, the levy would discourage banks from taking excessive risks and growing their balance sheets too far. By exempting banks with assets of less than $50 billion, Washington is also introducing the tax on size that many regulators have advocated.

The design of the levy appears to create an incentive for foreign banks to move funding outside the US. This is hardly good news for Britain, where there is already an excess of bank debt that needs refinancing.

It would be a surprise if some people in Government were not already contemplating the obvious solution. Introducing just such a levy here.

Bailouts, bonuses, and taxes

GOLDMAN SACHS is likely to report record profits for 2009. Morgan Stanley, a rival that missed out on much of last year’s bond-trading rally, may have made a loss. The silver lining, joke Morgan bankers, is that at least its people won’t get paid anything like Goldman’s—and should thus face less condemnation.

America’s big banks are girding themselves for a storm of abuse when they unveil their annual results, starting on January 15th with JPMorgan Chase. Vilified for vast losses in 2007-08, the problem now, for the pacesetters, is voluminous profits. The rebound in capital markets has pushed revenues back towards pre-crisis levels, and with them compensation pools. Goldman is expected to fork out $18 billion for 2009, not much less than its record payout in 2007.

Bank chiefs are not taking the issue lightly. They are addressing skewed incentives by, for instance, paying a bigger share of bonuses as deferred shares, with a greater opportunity to claw money back if trades go wrong. According to a survey by Mercer, a consultancy, two-thirds of global banks and insurers have stopped offering multi-year guaranteed bonuses to new hires (how the others still manage to get away with it is baffling).

More importantly for their public image, banks are lowering their “compensation ratios”. Investment banks used to give half their net revenues to employees. This year it will be closer to 40%.

Even so, the absolute numbers will still look indefensible, especially to the millions of Americans without a job. That leaves the banks destined to please no one: the public will see the pay numbers as disgracefully large, employees as disappointingly low. The mood on Wall Street is part frustration (that the cut in compensation ratios, the charitable giving and so on have failed to soften hearts); part fear (over possible defections to hedge funds); and part anger (over what financiers see as the Obama administration’s fanning of anti-bank sentiment).

All three emotions were heightened this week. Andrew Cuomo, New York’s attorney-general, demanded detailed information on pay policies from big banks. The Federal Deposit Insurance Corporation, meanwhile, said it would assess pay structures in calculating contributions to its deposit-insurance fund. And compensation featured heavily when the bosses of four big banks testified at the first hearing of the Financial Crisis Inquiry Commission.

But the biggest blow was news of a special levy on large financial institutions to cover forecast taxpayer losses of $117 billion on the Troubled Asset Relief Programme (TARP). The “Financial Crisis Responsibility Fee” will last a minimum of ten years and snare around 50 bankers and insurers with assets of more than $50 billion. Each will pay 0.15% of its eligible liabilities, measured as total assets minus capital and deposits (or, for insurers, policy reserves). So investment banks with few deposits will be hit harder than commercial banks.

The politics of the tax are clear. As banks’ pockets bulge again, they grow ever less popular. According to a Bloomberg National Poll in December, 64% of Americans think bailing them out was a mistake. Legislators are under pressure to respond. Unveiling the levy just before bonus season should play well in the heartland.

But politics is not the only motive. Hitting the giants addresses a genuine concern about banks whose size poses systemic dangers. True, the tax will reduce the funds available to bolster banks’ capital, and they may just pass the costs on to customers. But their bleating about unfairness—most have already repaid their TARP funds with interest—rings hollow. Like taxpayers, they are set to get a taste of what it is like to cover someone else’s losses.


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