Adding up levy’s costs for global banks

Q. It seems as if the banking industry is facing a barrage of new regulation. How does it all break down?

A. There has been a flurry of activity in recent weeks amid growing public and political rancour over huge bonus pots at institutions such as Goldman Sachs and JPMorgan.

The French and UK governments have chosen to target those bonus pay-outs, imposing a 50 per cent “supertax” on bonuses over a certain level (£25,000 in the UK, €27,500 in France, restricted to traders’ bonuses).

The US has taken a different tack, first proposing a 0.15 per cent levy on banks’ assets over $50bn to cover the costs of the federal bail-out of the banking sector.

Last week Barack Obama went further, stunning Wall Street by proposing the most far-reaching overhaul of the industry since the 1930s, including a ban on proprietary trading for banks’ own profit or investing in hedge funds and private equity groups, as well as unspecified new size limits on banks.

Q. That is a lot of new rules. What’s the justification?

A. Well, the cynical interpretation is that politicians see the taxation of banks and bankers as a vote-winner – especially attractive for the UK and US, where the incumbent governments are hardly popular at the moment.

Q What’s the non-cynical interpretation?

A. Even most banks admit they benefited either directly or indirectly from the massive government bail-out programmes over the past year or so. This is pay-back time.

Q. And are all the schemes certain to happen?

A. In the UK and France, pretty much. In the US, most people expect both schemes to get watered down as they pass through Congress.

Q. If they do happen, will global banking groups have to comply with multiple rules in different jurisdictions?

A. Yes. That’s the trouble with the dash by politicians to introduce these taxes now. In the background, global regulators, led by
the Basel Committee on Banking Supervision, are working away on measures designed to make banks safer for the future – and create the same level playing field for everyone. But over the past six weeks, the UK, US and France have announced taxes and legal changes that are not co-ordinated.

Q. How do the three taxes in the UK, France and the US mesh together?

A. They don’t. Double taxation treaties between the countries don’t apply so banks that operate in all three jurisdictions, notably the big French banks such as BNP Paribas and Société Générale, will get hit three times.

Q. Which is the best plan?

A. Very difficult to say. Slapping bankers with a one-off tax on their bonuses seems like a pretty cynical political gimmick, given that it will do little if anything to reduce systemic risks in the banking system.

Q. So the US proposal is the perfect solution?

A. Far from it. For one thing, it’s a tax, and taxes are never going to be popular with anyone who has to pay them. And while the UK and French schemes are designed to be single-year, one-off taxes and raise only a few hundreds million dollars, if you believe the government estimates, the Obama levy is projected to last for 10 years and raise $90bn.

Q. But it’s seen as fairer. How can that be?

A. Even though Mr Obama accompanied the unveiling of the levy with strong rhetoric about “obscene” bankers’ bonuses, the tax itself is directed not at bonuses but at balance sheets.

Q. Surely banks will find ways around it, in any case?

A. Very likely. The US balance sheets both of US banks and the US subsidiaries of foreign institutions are likely to shrink in order to minimise tax liabilities. Businesses such as prime brokerage and repo – repurchase – funding could easily be booked in other jurisdictions, bankers say, vastly reducing the size of taxable operations.

Q. But the second Obama initiative sounds far more punitive?

A. Well maybe not. A lot of proprietary trading is difficult to split out from client trading, so implementing the rule will be tricky. Bankers also point out that there is a lot of flexibility in how banks channel international business to various bits of the group. Particularly for non-US banks, there may be scope to reroute prop trading or hedge fund and private equity business through European centres. The details aren’t clear and a lot depends on whether European governments adopt a similar crackdown.