Gordon Brown predicted a global agreement on a new levy on banks on Monday, but there are growing fears that describing the charge as an “insurance fee” could encourage financial institutions to become more reckless.
Finance ministry officials from around the world debated the plans at a Downing Street seminar on Monday, where concerns were raised that charging banks for insurance could create moral hazard.
“I don’t think talking about insurance is the right language,” said one official.
“That implies that banks could go off and do something reckless because they believe they have paid a fee and therefore they’re insured by the taxpayer.”
While the language around any levy might be causing problems, there is a growing view in Downing Street that Group of 20 countries will embrace some kind of charge to reflect the risks banks pose to financial stability.
Mr Brown said: “I think you will probably see further moves to get an international agreement about some international levy to deal with the responsibility that banks owe to society.”
The prime minister claimed that the backward-looking levy imposed on the banks by Barack Obama earlier this month was “not dissimilar” to the kind of proposals he made at last year’s Group of 20 meeting in St Andrews.
Mr Brown insisted on Monday that the British government would not impose a retrospective charge because he said he was already confident “we will make a profit” from the taxpayer’s rescue of the banking system, including RBS and Lloyds.
But he believes that Mr Obama’s crackdown on the banks has raised the likelihood that the world’s leading economies can agree higher capital levels for banks and some kind of levy on the sector.
The International Monetary Fund will report on various options in April and the issue is expected to be at the top of the agenda of November’s meeting of the G20 in South Korea.
Mr Brown’s initial preference was for a tax on financial transactions, or Tobin tax, although that was rejected immediately by Tim Geithner, the US Treasury secretary.
Lord Myners, the City minister, told the BBC on Monday: “There are some things like transaction taxes which simply wouldn’t work unless they are implemented across the board.”
Lord Myners, who hosted the Downing Street meeting of finance ministry officials and academics, wants to institute a system – including so-called “living wills” – so that a bank would have more capacity to fail without triggering a systemic crisis.
The seminar also discussed the prospect of banks taking on more contingent capital – debt that can be converted into equity in a banking crisis – so that bondholders are more directly on the hook if a bank gets into trouble.
However, some officials argue that such capital may still not provide a sufficient buffer in the event of a global financial crisis, hence the need for some kind of levy on the whole sector to guard against a future crash.