Payback time (updated)

The International Monetary Fund published a report on banking, ahead of the G20 meeting of ministers on 23 April. The IMF states that banks should now pay for the bailout they received from governments during the credit crunch of 2008/9. As the first Guardian article states:

It is payback time for the banks. Widely blamed for causing the worst recession in the global economy since the 1930s, castigated for using taxpayer bailouts to fund big bonuses, and accused of starving businesses and households of credit, the message from the International Monetary Fund is clear: the day of reckoning is at hand.

The Washington-based fund puts the direct cost of saving the banking sector from collapse at a staggering $862bn (£559bn) – a bill that has put the public finances of many of the world’s biggest economies, including Britain and the United States, in a parlous state. Charged with coming up with a way of ensuring taxpayers will not have to dig deep a second time, the top economists at the IMF have drawn up an even more draconian blueprint than the banks had been expecting.

The IMF proposes two new taxes. The first had been expected. This would be a levy on banks’ liabilities and would provide a fund that governments could use to finance any future bailouts. It would be worth around $1500bn: some 2.5% of world GDP, and a higher percentage than that for countries, such as the UK, with a large banking sector.

The second was more surprising to commentators. This would be a financial activities tax (FAT). This would essentially be a tax on the value added by banks, and hence would be a way of taxing profits and pay. Currently, for technical reasons, many of banks’ activities are exempt from VAT (or the equivalent tax in countries outside the EU). The IMF thus regards them as under-taxed relative to other sectors. If such a tax were levied at a rate of 17.5% (the current rate of VAT in the UK), this could raise over 1% of GDP. In the UK this could be as much as £20bn – which would make a substantial contribution to reducing the government’s structural deficit of around £100bn

Meanwhile, in the USA, President Obama has been seeking to push legislation through Congress that would tighten up the regulation of banks. On 20 May, the Senate passed the bill, which now has to be merged with a version in the House of Representatives to become law. A key part of the measures involve splitting off the trading activities of banks in derivatives and other instruments from banks’ regular retail lending and deposit-taking activities with the public and firms. At the same time, there would be much closer regulation of the derivatives market. These complex financial instruments, whose value is ‘derived’ from the value of other assets, would have to be traded in an open market, not in private deals. A new financial regulatory agency will be created with the Federal Reserve having regulatory oversight of the whole of the financial markets

The measures would also give the government the power to break up financial institutions that were failing and rescue solvent parts without having to resort to a full-scale bailout. There is also a proposal to set up a nine-member Council of Regulators to keep a close watch on banking activities and to identify excessive risks. Banks would also be more closely supervised.

So is this payback time for banks? Or will higher taxes simply be passed on to customers, with pay and bonuses remaining at staggering levels? And will tougher regulation simply see ingenious methods being invented of getting round the regulation? Will the measures reduce moral hazard, or is the genie out of the bottle, with banks knowing that they will always be seen as too important to fail?

IMF Webcast
Press Briefing by IMF Managing Director Dominique Strauss-Kahn IMF Webcasts (22/4/10)
Transcript of the above Press Briefing

Articles
The IMF tax proposals
IMF proposes two taxes for world’s banks Guardian, Jill Treanor and Larry Elliott (21/4/10)
IMF gets tough on banks with ‘FAT’ levy Guardian, Linda Yueh (21/4/10)
Q&A: IMF proposals to shape G20 thinking Financial Times, Brooke Masters (21/4/10)
The challenge of halting the financial doomsday machine Financial Times, Martin Wolf (20/4/10)
IMF’s ‘punishment tax’ draws fire from banking industry Financial Times, Sharlene Goff, Brooke Masters and Scheherazade Daneshkhu (21/4/10)
Squeezing the piggy-banks Economist (21/4/10)
IMF, part two Economist, ‘Buttonwood’ (21/4/10)
IMF proposes tax on financial industry as economic safeguard Washington Post, Howard Schneider (20/4/10)
IMF wants two big new taxes on banks BBC News blogs, Peston’s Picks, Robert Peston (20/4/10)

Obama’s proposals
Obama pleas for Wall Street support on reforms Channel 4 News, Job Rabkin (22/4/10)
Q&A: Obama’s bank regulation aims BBC News (22/4/10)
US banks may not bend to Barack Obama’s demands Guardian, Nils Pratley (22/4/10)
President Obama attacks critics of bank reform bill BBC News (23/4/10)
US Senate passes biggest overhaul of big banks since Depression Telegraph (21/5/10)
Finance-Overhaul Bill Would Reshape Wall Street, Washington Bloomberg Businessweek (21/5/10)
US Senate approves sweeping reforms of Wall Street (including video) BBC News (21/5/10)
Obama gets his big bank reforms BBC News blogs: Pestons’s Picks, Robert Peston (21/5/10)

Questions