IMF plans radical bank tax to fund future bailouts

The IMF is set to propose new taxes on global financial institutions. The double-tax plan, which was leaked in Washington yesterday, proposes one levy, a Financial Stability Contribution (FSC), to fund any future government support, and another, a Financial Activities Tax (FAT), that will place a tax on the profits and pay at financial institutions.

The recommendations, which are likely to strike terror into banks now coming to terms with new regulatory energy to prosecute securities fraud, could potentially cost the financial sector as much as $2 trillion and go toward repairing the economic damage wrought by this and future financial crises, and towards general government revenues.

While contributions would be determined by each country's government, the leaked report anticipates that between 2 per cent and 4 per cent of gross domestic product would be raised. The rate could be adjusted to reflect risk. "The FSC would ensure that the industry helps meet the costs of any potential resolution and would reduce systemic risk," the report said. Insurers, hedge funds and other financial institutions should also pay the taxes,
the IMF argues, despite being less apparently culpable for the recent financial crisis.

On the day that Goldman Sachs reported $3.46 billion in first quarter profits, the IMF proposals were broadly welcomed by UK politicians. "The recognition that banks should make a contribution to the society in which they operate is right," said Alistair Darling. "Any agreement has to be international and that unilateral attempts would simply risk being undermined."

Yet banking groups said they were surprised by the extent of the proposals. Angela Knight, chief executive of the British Bankers Association, said the double-tax proposals appeared "wider than expected".

And there is vocal opposition to both taxes from Canada which will host the next G20 in June. "I do not believe that this would be an appropriate tool for all countries," argues Canadian finance minister Jim Flaherty. "A global levy could also result in excessive
risk-taking as a result of a perceived government guarantee against failure." Other voices made the same point last night.

The IMF says it's not necessarily endorsing the idea; in an unrelated report yesterday the body stated that unprecedented government debt now poses far more serious problems to the global financial system than the banking system.

"The crisis has led to a deteriorating trajectory for debt" among developed countries, which could cause higher interest rates and slower growth and weaken the broader financial system, the body warned.

Two former senior IMF economists, Harvard professor Kenneth Rogoff, and Carmen Reinhart, now at the University of Maryland, have warned that banking crises can trigger sovereign debt crises years later, partly because governments spend so heavily to restore their banking systems.

As the Greek foreign minister prepares to come to Washington, seeking support for a $30 billion IMF bailout, the lessons of runaway banks are clear enough. "Advanced countries have the debt levels that they had after World War Two but without a world war," explained Jose Vinals, head of the IMF's monetary and capital markets department. Greece's experience of trying to get out from under a $100 billion mountain of debt should serve as a wake-up call, he added. ·