by Linda Beale
cross posted with Ataxingmatter
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.