Tags: Big | Bank | Tax | Pay | Bailouts

European-Style Big Bank Tax to Pay for Bailouts Gaining Traction

By Frank McGuire   |   Tuesday, 30 Mar 2010 10:40 AM

The United States and Britain reportedly are moving closer to imposing a tax on large financial institutions that would protect taxpayers if there are future bank failures, placing any financial liabilities on shareholders and creditors instead.

Officials in the U.S., Europe and the IMF say the bank-tax concept has gained so much momentum that it is likely to be on the agenda when of the Group of 20 industrial and developing nations meet in Canada in June.

The G-20 is looking at ways to protect taxpayers from future banking crises, after several governments were forced to step in to bail out big financial institutions during the credit crunch.

"Reforms would put in practice the principle that large institutions should bear the costs of any losses to the taxpayer," U.S. Treasury Secretary Timothy Geithner said in a speech last week.

The plans for the levy differ. Germany and Sweden would use the money to fund a "resolution authority" that would use the money to shut troubled banks whose failure would put the broader economy at risk, The Wall Street Journal reported. Others, such as France, would assess the fee after a crisis has passed.

The United States is split. Congress is moving toward imposing a levy to build a fund before a crisis. The Obama administration favors the postcrisis option, a difference that will be worked out as legislation on financial regulation moves through Congress, the newspaper report said.

The proposals face opposition from banks, who argue that the levies are discriminatory and would limit their capacity to lend, the Journal reported.

"Global policy makers should be very cautious about advancing any public policy that removes capital from the system, be it in the form of a tax, a fee or otherwise," Rob Nichols, president of the Financial Services Forum, a trade association of large U.S. financial institutions, told the Journal.

"It's not a bailout fund, as someone said, it's really a taxpayer protection fund," FDIC Chairman Sheila Bair told CNBC. "It will set up a mechanism going forward that doesn't put the taxpayer at any risk for resolving one of these very large entities if they get in trouble again."

Britain will press finance ministers at next month's IMF and World Bank meetings in Washington on the plans, Chancellor Alistair Darling recently said.

"More countries now agree on the need for an international systemic tax on banks. This must be brought forward quickly," Darling told parliament during his budget speech last week.

"I agree with all those who think that such a tax should be internationally coordinated. Going it alone would costs thousands of jobs, not just in London, but across the country," he said.

French Finance Minister Christine Lagarde called a bank tax "an interesting concept which can take several forms" in an interview earlier this month with French newspaper "Les Echos."

German Chancellor Angela Merkel backs a similar tax and is expected to unveil a plan to her Cabinet for approval on Wednesday.

Support for a bank tax isn't unanimous among the G-20. "We are rejecting it out of hand," Canadian Finance Minister Jim Flaherty told the Journal.

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