Start the conversation
The International Monetary Fund (IMF) is proposing that Group-of-20 (G20) nations levy two separate taxes on banks, including a "Fat Cat" tax on profits and compensation to pay for the costs of any bailouts resulting from future financial crises.
"Expecting taxpayers to support the [financial] sector during bad times while allowing owners, managers and/or creditors of financial institutions to enjoy the gains of good times misallocates resources and undermines long-term growth," the IMF wrote in a briefing paper for the G-20 industrialized and developing countries, obtained by The Wall Street Journal.
The report proposes a tax - called the Financial Activities Tax (FAT) or "Fat Cat" tax - that would be levied against financial institution balance sheets, profits and compensation. It would be paid into a nation's treasury to help finance the broader costs of a financial crisis, The Journal reported.
A second tax - the "Financial Stability Contribution," (FSC) - would be specifically designated to pay for the costs of winding down troubled financial institutions, ensuring that taxpayers won't have to pay trillions of dollars to keep banks in business.
That tax would raise between 2%-4% of the G20 countries' gross domestic product (GDP), or about $1 trillion to $2 trillion over time. In the case of the United States, about 2% of GDP would equate to $300 billion.
Initially, the FSC would be a flat fee, but it could be adjusted periodically to reflect the "riskiness" of an institution and its "contribution to systemic risk," the IMF said.
The report, which was initially disclosed by British Broadcasting Corp. (BBC), is sure to play a major role in the political and economic debates that will take place at the G20 finance ministers meeting on Friday and an IMF meeting this weekend in Washington.
"We want proposals agreed as soon as possible," British finance minister Alistair Darling told the BBC's Newsnight program. "I think there's every chance of getting an agreement (although) it may not be in the exact shape or form of what the IMF are saying."
Financial institutions have to pay something back to the societies in which they operate, Darling added.
Still, reaching an agreement this week remains unlikely because it remains unclear whether European delegations will make it to the meetings due to flying restrictions caused by a volcanic ash cloud.
Bank lobbying groups, meanwhile, say they were concerned that new taxes could damage competitiveness.
"All taxes have an impact and more tax has more impact," said a spokesman for the British Bankers' Association. "The recommendations need to be carefully examined, but we remain concerned about moves which could place the U.K. industry at a competitive disadvantage."
The IMF said the report was just an interim report and a final proposal would be presented to G20 leaders in June.
In the United States, the Obama administration and Congress are considering versions of a bank tax that are milder than the IMF proposal. U.S. officials told Reuters the IMF was playing a "useful role," but didn't comment directly on the report.
The IMF proposal is aimed at advising countries with very diverse political and economic systems how to simplify the structure of a bank tax. The IMF stressed that international cooperation was important and Darling noted that any bank levy had to be global in order to prevent regulatory arbitrage.
The IMF said that a nation didn't need to have a designated fund with so-called resolution authority in order to implement the "Fat Cat" tax. Instead, the tax money could go to general revenue and only be used in the event of a financial crisis. But the IMF warned that not setting aside funding for a resolution authority increases risks the money could be already spent when a problem occurs.
Critics of resolution authorities, however, argue that the existence of a well-funded mechanism for shutting down financial institutions would encourage banks to take risky behavior because governments would use the money to keep them alive rather than shut them.
The IMF proposal leaves open the possibility that a failing bank could be kept alive, although managers would be replaced and shareholders and lenders would be expected to take big hits.
Meanwhile, there appeared to be some movement on banking reform in U.S. Congress, as Republicans were said to be moving towards compromising on a bill - despite a unanimous vote in the Senate last week opposing the legislation.
Senate Banking Committee Chairman Christopher Dodd, D-CT, said a number of Republicans want to support his financial overhaul bill and are being hamstrung by Senate Republican leaders.
"I have an awful lot of Republicans who are willing," Dodd said in an interview with Bloomberg Television. "The question is whether the leadership will allow them to do it."
News & Related Story Links:
- Wall Street Journal:
IMF to Nations: Tax Finance Firms
IMF proposes two new bank taxes to fund bailouts
Dodd Says Many Republicans Want to Support His Bill
- Money Morning:
How to Stop Greedy Banks From Killing U.S. Capitalism
- Money Morning:
New Banking Regulations ... Same Old Story