economics

January 14, 2010

Making the banks pay

Filed under: Uncategorized — ktetaichinh @ 9:14 pm
Tags: , , ,

BARACK OBAMA is preparing to discuss the details of his bank tax, which will officially be dubbed the “Financial Crisis Responsibility Fee” (PDF). It is, basically, a tax on bank size and leverage. The fee will only apply to firms with $50 billion or more in consolidated assets, and the administration expects that the bulk of the revenue generated by the fee will come from the nation’s ten largest banks. American subsidiaries of foreign firms will be subject to the fee.

To figure out what is owed, the government will take a bank’s total assets and subtract from that amount Tier 1 capital and insured deposits. What’s left is “covered liabilities”, to be taxed at a 0.15% rate.

The administration is clear in its desire that this function as an incentive for banks to get smaller and less leveraged:

The fee the President is proposing would be levied on the debts of financial firms with more than $50 billion in consolidated assets, providing a deterrent against excessive leverage for the largest financial firms. By levying a fee on the liabilities of the largest firms – excluding FDIC-assessed deposits and insurance policy reserves, as appropriate – the Financial Crisis Responsibility Fee will place its heaviest burden on the largest firms that have taken on the most debt. Over sixty percent of revenues will most likely be paid by the 10 largest financial institutions.

What’s mystifying, then, is that the fee will only apply until TARP has been repaid. If it is understood that a tax discouraging excess leverage is a good thing, I’m not sure why you’d want the tax to sunset as soon as the bill from the last crisis is settled, especially since that will probably be right around the time that everyone will forget how dangerous big banks can be.

Perhaps the president anticipates that by the time the fee is set to end, the debate over how to close the country’s long-run budget gap will have heated up considerably—so much so that the bank fee revenue source will be considered indispensible. For once, that would be government policy mission creep would could believe in.

Volcker Stands Up for Fed Role in Financial Oversight

The Federal Reserve must have a “strong voice and authority” on regulatory matters, Paul Volcker, an economic adviser to President Barack Obama, said on Thursday.

Mr. Volcker, a former Federal Reserve chairman, told a lunch meeting at the Economic Club of New York that he had been “particularly disturbed” by proposals to strip the Fed of its supervisory and regulatory responsibilities.

“What seems to me beyond dispute, given recent events, is that monetary policy and the structure and condition of the banking and financial system are irretrievably intertwined,” said Mr. Volcker, who chairs the President’s Economic Recovery Advisory Board, a panel of outside advisers set up at the start of the Obama administration.

Mr. Volcker said that administration plans to impose a fee on major financial institutions to recoup the cost of bank bailouts was “not an unreasonable response, given the fact that he’s got to do something.”

Obama calls for bailout tax

The president’s proposal calls for the tax to be in place for a minimum of 10 years, but longer if necessary. “The fee will stay in place until every penny of TARP is repaid,” a senior administration official said.

If passed by Congress, it would take effect on June 30 and is estimated to raise $90 billion over 10 years. More than 60% of the money is likely to come from the 10 largest financial institutions.

Firms could be subject to the fee even if they never took TARP funds or if they took TARP funds but repaid them. That’s because all major financial institutions benefited directly and indirectly from the efforts to stabilize the financial system, according to the administration.

If the fee ends up raising more money than is needed to fully repay the bailout money, the additional funds would be used to help improve the U.S. fiscal position, which was worsened by the crisis, the senior administration official said.

A group representing 100 financial services companies wasted no time in blasting the proposal.

“Two-thirds of the TARP investment from banks has already been repaid with a large profit to the taxpayer,” said Steve Bartlett, president of the Financial Roundtable. “This proposed tax will do nothing more than stifle economic recovery and encumber more pressing concerns, such as covering new regulatory costs.”

Obama bluntly said that banks should tap their bonus pools to pay the fee.

“I’d urge you to cover the costs of the rescue not by sticking it to your shareholders or your customers or fellow citizens with the bill, but by rolling back bonuses for top earners and executives,” he said.

Firms targeted by the fee

Firms subject to the fee would have to have more than $50 billion in assets and must be a bank holding company, a thrift holding company, an insurer or a broker-dealer. Smaller firms and community banks would not be affected, the official said.

The fee would be assessed on an institution’s liabilities minus its domestic deposits and core capital, which is the firm’s cushion against possible losses. It’s designed to tax firms with the greatest leverage, which is a proxy for how much risk the firm is taking in the markets.

The fee would be approximately 0.15% of a firm’s covered liabilities. So, for example, a firm with $1 trillion in assets minus $100 billion in core capital and $500 billion in deposits, would leave it with $400 billion in covered liabilities. Consequently the firm would be charged approximately $600 million for the fee. (0.15% x $400 billion).

The administration estimates that roughly 50 companies will have to pay the fee, of which 20 to 27 would be banking institutions, according to the official. Roughly 35 would be U.S. companies and the rest would be the U.S. subsidiaries of foreign companies.

Some major beneficiaries of the financial bailout will not be subject to the fee – namely, mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) and automakers GM and Chrysler.

In those cases, the administration didn’t think the fee would be workable both because of the structure of those companies’ assets and because of their current condition, the senior administration official said. To top of page

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