Bank Tax: France, Germany and UK, but where’s the USA?
by Linda Beale
cross posted with Ataxingmatter
Bank Tax: France, Germany and UK, but where’s the USA?
On June 23, the big three Euro countries–France, Germany, and Britain–agreed to tax banks directly, “to ensure that banks make a fair contribution to reflect the risks they pose to the financial system and wider economy, and to encourage banks to adjust their balance sheets to reduce this risk.” See Saltmarsh, France, Germany and UK Support Bank Tax, NY Times, Jun 22, 2010; Eddy, Germany, France, UK commit to bank tax, IdahoStatesman.com, Jun 22, 2010; Cf Berlin approves bank levy plan to fund future bailouts, Deutsche Welle, Mar. 31, 2010.
The tax in the UK (which is also increasing its capital gains tax) will be imposed on banks with liabilities in excess of $20 billion pounds and should raise about $3 billion a year. Saltmarsh op cit. It will be based on the aggregate amount of riskier liabilities (i.e., liabilities other than Tier 1 capital and insured deposits). Berlin’s Finance Ministry noted that “All three levies will aim to ensure that banks make a fair contribution to reflect the risks they pose to the financial system and wider economy, and to encourage banks to adjust their balance sheets to reduce this risk.” IdahoStatesman op cit.
Although the US has ostensibly supported such a tax, we have been notoriously reluctant to impose any real constraints on banks. The financial reform legislation wending its way through Congress has been watered down, so that both consumer protection and protection of the national fisc have given way to the desire of banks to continue to grow in size so that they can compete globally. Geithner has indicated that big banks are essential so they can lend to big multinational corporations and so that US banks can “be competitive” with foreign banks.
This competitiveness stuff is nonsense. What good is it to have a competitive monster that we have to stand behind and whose costs of funds depend in part on an implicit guarantee that the government will backstop its losses? Why can’t a bevy of smaller banks serve big multinationals banking needs? Sure, it means that funds may be more costly to the banks and that big multinationals may not have as big an advantage compared to smaller firms. Both of those are GOOD results–we need to think about ways to downsize banks. I’d prefer Merkel & Levin’s proposal for limiting size by setting liability and asset caps but surely we should not continue to refuse to enact good reforms for the sole purpose of letting banks continue to be too big to fail! A bank tax based on risky liabilities is an excellent way to recoup some funds from banks that benefit from the cost of funds advantage of an implicit government guarantee and at the same time incentivize banks to hold less of such risky liabilities.
Yeah, let’s be more like France.
Sheesh! That other countries do a thing doesn’t make it the right thing to do.
We knew it was the right thing to do after the bailout. One worry, however, was that other countries might not follow suit, and we would lose the banking business. That worry is over now.
The UK tax is pretty much what Obama has actually proposed. It’s also what comes from the work of what I think is the most perceptive economist on this matter, Gary Gorton.
Banking systems without deposit insurance are subject to runs. The shadow banking system (ie, the wholesale markets) do not have deposit insurance. The shadow banking system was indeed subject to a run. It will be again unless there is a form of deposit insurance. Thus the levy….to be paying for the insurance that the government is offering (for whatever anyone says or does, no government will allow the entire banking system to fall over: nor should they.)
I think it’s a terribly sensible idea: which is of course why it has problems politically. But the reason that the US is late on implementing it, even while it was the first to propose it, is just a feature of the US system. It just takes a long time to get things into law in the US system.