A global tax on banks and bankers?

The weekend’s International Monetary Fund and World Bank meetings brought a flurry of interest in a new global tax or levy on banks as a way of punishing them for the crisis and ensuring they pay for the implicit taxpayer insurance they enjoy. I described the idea of Dominique Strauss-Kahn, head of the IMF, as an empty gesture at the weekend, since it was designed to make him sound tough on banks without any possibility of implementation.

That still applies, but there are a whole host of competing policies that all shelter under the same umbrella term of “global tax on banks”. These plans are quite separate and I shall attempt to go through them here.

The unifying feature of all the ideas is that taxpayers ultimately stand behind banks and should receive a fee for the implicit insurance they offer. In many ways, this position is a counsel of despair. It suggests we will fail to create a financial system in which no bank is too big or too interconnected to fail, and the authorities will also fail in ensuring capital requirements are adequate to stand as a buffer against failure.

Both of these failures of public policy would be required for a tax to make sense and the public sector still to be involved in remunerated bailouts in future, except in the most catastrophic circumstance.

Of course, this raises the question that if public policy is so bad at regulating banks, why should the public trust the same authorities to extract profits from banks so that they can organise a future bailout. What about the policies themselves? How likely are any to becoming reality?

Tax on banks to fund IMF bailouts. This idea clearly has Mr Strauss-Kahn excited. He said: “Having some money coming from the financial sector to create a kind of Fund insurance or funding for low-income countries… is something we are going to consider”. But it is going nowhere. Partly because countries such as Britain and the US will not accept the loss of sovereignty from a global tax; partly because countries such as Germany think the Fund is getting too big for its boots; and partly because other officials are very worried about the idea of the IMF getting involved in bailouts to financial systems of countries that could finance the bailout themselves. This, they say, is fundamentally against the purpose of the IMF: namely to lend to countries facing liquidity crises.A Tobin tax on transactions. This is going nowhere and now seems to have almost no support from any serious organisation.A global agreement for national bank levies. Similar to European agreements on deposit insurance, there is at least a possibility that countries might agree that they all need some backstop insurance against bank failures paid for by the banks themselves. Countries might think this is sensible and want a global agreement, but the history of banking and tax regulations suggests this would be very hard to achieve. The same sovereignty concerns that have scuppered so many international proposals in the past apply here.National bank levies without a global framework. This idea has been proposed by Paul Tucker, deputy governor of the Bank of England. He called it a Capital Of Last Resort function of government in a speech in Tokyo in May. “If it is unavoidable that, instead of allowing banks to fail, the banking system occasionally needs to be rescued through injections of equity capital, ‘insurance’ is in effect being extended to ordinary creditors generally and not just to retail depositors,” he said, and this would necessitate ”a right to claim back the eventual cost, if any, from an increased ‘insurance’ levy on the banking system over a period of years beginning after the crisis had clearly passed.”

The last idea seems to be the best of the bunch, both in principle and because it could be enacted. It doesn’t compromise the sovereignty of national tax policies; it doesn’t require pre-funding because the authorities still have every incentive to prevent a crisis; but if one occurs, it demands repayment for the insurance after the event. But as Mr Tucker said: “It would be very important that [such as scheme] was not overused”. But then again, it is not a global tax on banks.

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