Risky business: officials are looking at levies on institutions to fund bail-outs such as that of Royal Bank of Scotland

Tobin, or not Tobin? That is the question. The answer seems to be the latter, judging from the slings and arrows that finance ministers have aimed forcefully at the idea.

When Gordon Brown, British prime minister, unexpectedly popped up at the weekend’s meeting of G20 finance ministers and floated the possibility of a “Tobin tax” on financial transactions, it represented something of a volte-face on his part. But the largely hostile reaction from other countries and his own rapid backtracking suggested that he had either misread his audience or was bashing bankers for domestic political ends.

Options

In a speech to the G20 on Saturday, Gordon Brown proposed four choices for the financial sector.

●An insurance fee to reflect systemic risk. This is the idea, popular in the US and elsewhere, that systemically important banks should hold more capital than systemically irrelevant banks.

●A resolution fund that banks pay into and could tap in the event of a collapse. This would be unlikely ever to be sufficiently large to pay for a crisis of 2008-09 proportions.

●A scheme to swap debt into equity when capital levels fall too low.

●A global financial transactions levy or Tobin tax, which was heavily criticised at the summit.

Yet the financial transactions tax was merely one of four options laid out by Mr Brown. And bankers and their representatives have declared themselves to be more open to discussing the others, including the possibility of a regime that makes financial institutions pay for the cost of insuring against their own crises.

Part of the complexity of the Tobin tax debate is that different advocates have different objectives. For some, it is a revenue-raising device, perhaps for development aid. For others, it is intended to calm destabilising financial speculation. But its impact on the volatility of the financial markets on which it is levied is unclear – and as for the currency markets, its original intended target, they have remained remarkably quiescent throughout the global financial crisis.

Attention among officials and bankers has shifted to another of Mr Brown’s options – a fund to rescue troubled financial institutions, to be financed by a levy on the banking system itself. Such a scheme would be like a more expansive version of the deposit guarantee system such as the US’s Federal Deposit Insurance Corporation (FDIC).

Paul Tucker, deputy governor of the Bank of England, said in a speech this year that such a scheme could be financed after the event, with banks taxed to pay for bail-outs.

“The authorities would, in effect, loan their capacity to fund and absorb risk to the banking system for a temporary period during the height of the crisis but would eventually be repaid by the system,” he said in May.

Josef Ackermann, chief executive of Deutsche Bank and chairman of the Institute of International Finance an industry body, said last week he saw “some merit” in setting up such a fund, perhaps on a pan-European basis.

“Such a fund would have many advantages – there would not be the midnight scramble for funds before Tokyo opens,” Mr Ackermann said. “The conditions for access to such a fund could be clarified ex-ante, so that the process would become more automatic and would be known to everyone before a crisis strikes.”

Yet questions remain. Charles Dallara, the IIF’s managing director, said on Monday that while the institute opposed a Tobin-style tax, a resolution fund was “a debate worth having”, as long as the public as well as the private sector bore some of the cost. But he added that a cross-border rescue backstop might merely underwrite risky behaviour by banks. “We have to be careful that we don’t go from one kind of moral hazard – the ‘too big to fail’ problem – straight to another,” he said.

One suggestion is that the levies on banks could vary according to their riskiness, including their size. But Mr Dallara said: “It is an idea worth exploring, but it is not clear how you gauge the riskiness of an institution, given that risks can change considerably.”

And some argue that simply forcing banks to hold more capital is in itself a form of risk-based levy. In a recent discussion paper and speech, Lord Turner, chairman of the UK Financial Services Authority, talked about higher capital requirements as a kind of “tax on size or on other measures of systemic importance”.

The International Monetary Fund, which has been asked to look into the issue, will report back in April, and for the moment is declining comment on its views on what a bank resolution fund would look like. But one thing is certain: if the Tobin tax was ever a runner, it has slipped to a rank outsider – if not altogether out of the race.