Go to the Globe and Mail homepage

Jump to main navigationJump to main content

(JO YONG-HAK/Jo Yong-Hak/Reuters)
(JO YONG-HAK/Jo Yong-Hak/Reuters)

What's on the table in Busan Add to ...

Global leaders have agreed that banks should be made to pay for bailing out the sector in a future crisis so they can no longer believe they are "too big to fail" or that taxpayers will always be there to rescue them. No deal on a specific tax is expected in Busan this week.

WHAT'S BEEN PROPOSED AT THE GLOBAL LEVEL?

The International Monetary Fund has proposed two new taxes on banks: a financial stability contribution (FSC) would be linked to a mechanism to pay for the fiscal cost of any future government support to the sector. The IMF says any further contributions, if desired, should be raised by a financial activities tax (FAT) levied on the profits and remuneration of financial institutions.

The FAT tax could raise amounts equivalent to 0.2-0.4 per cent of a country's gross domestic product, and the FSC tax could build-up a fund equivalent to 2 to 4 per cent. The current crisis has cost G20 countries about 2.7 per cent of GDP.

IS THE IMF PLAN THE ONLY GAME IN TOWN?

Not by a long shot.

Sweden has already introduced a levy on banks that goes into a ring-fenced fund. Germany is formulating a similar measure and Britain's new coalition government has said it wants to introduce a bank levy.

U.S. President Barack Obama has proposed a levy to recoup $90-billion (U.S.) of public money used so far to shore up banks.

The European Union's financial services chief Michel Barnier has outlined plans for a levy on banks to build up dedicated resolution funds in each of the 27 EU states.

Canada is proposing "embedded contingent capital" as an alternative to a global levy. Contingent, or "top up," capital is a debt instrument that converts into common equity during a period of financial strain, effectively shoring up a bank's capital position without diluting shareholders' holdings until needed.

Japan says its deposit insurance scheme already plays a similar role to a bank tax.

IS A GLOBAL LEVY NOW IN THE BAG?

Far from it.

While there is support in Europe and the United States for some form of levy, Canada and other nations, such as Australia and Brazil feel their banks should not be penalized with an extra tax as they did not require rescuing.

Apart from some opposition to the principle of a tax, there is also disagreement over its scope and use.

Sweden and Germany back a dedicated fund for winding up banks in a future crisis. Britain and France want money raised by a levy to go directly into the treasury. The U.S. plan is only for recouping taxpayer aid in the current crisis and then it would expire.

Some central bankers and countries like Britain and France are against building up funds for a future crisis, saying it creates "moral hazard" by potentially encouraging banks to be risky, knowing there are funds at hand to bail them out.

The betting is that no single, uniform global bank levy will be agreed and that G20 members can tailor a levy to their own national circumstances, with some countries not imposing one at all, raising the prospect of competitive distortions and loopholes.

DEAL IN SEOUL?

Some G20 leaders want a deal on tax by the Seoul summit in November. Some policy makers already fear a long debate over a levy will sap momentum in implementing core G20 pledges to make the financial system safer, particularly the introduction of tougher Basel III bank capital and liquidity requirements.

A tax would win backing from a public angry with how banks have messed up the economy, but making it work and universal won't be easy or quick.

Banks already complain that Basel III alone will be overly burdensome and threaten to derail economic recovery. Topping this up with new taxes will only reinforce these views and hamper G20 attempts to achieve consensus on a tax.

R.I.P TOBIN TAX?

A tax on financial transactions - named after the U.S. economist James Tobin who came up with the original idea in the 1970s but which was never adopted globally - was rejected last year by the United States, effectively sealing its fate. The IMF has said a transaction tax will not work but some German politicians are still pressing for one.

 

In the know

Most popular videos »

Highlights

More from The Globe and Mail

Most popular