As taxes go — particularly ones sketched out on the back of a fag packet — the Obama levy on US-based banks is rather a good one. Certainly better than our half-baked tax on bonuses.
It seems entirely fair that banks should pay the US taxpayers’ bill for bailing out the financial system. This support not only saved the banks but is now ensuring that many are making bumper profits.
But which banks should pick up the tab? As I pointed out earlier this week, a levy based on banks’ total liabilities — as was originally mooted — would fall heavily on those banks with large retail deposits. Yet these banks were, on the whole, the least to blame for the crisis. The problems were caused by those institutions, such as Lehman Brothers and Northern Rock, that were more reliant on funding from the wholesale markets. It would seem fairer if the levy was tied to wholesale funding.
And that, essentially, is exactly what the Obama Administration announced yesterday. By excluding insured retail deposits, the 0.15 per cent levy on liabilities is focused on wholesale funding. This means that the likes of Goldman Sachs will be hit hard — some analysts estimate its tax bill next year could be 7 per cent of earnings — whereas purely retail banks will largely escape.
Foreign banks will also be caught with analysts at Morgan Stanley calculating that the tax would cut Barclays’ earnings by 4 per cent next year and HSBC’s by 2 per cent. The hit for RBS is more difficult to estimate but is likely to be relatively smaller. Share prices have reacted calmly, perhaps because investors are expecting it be watered down. Opponents will be able to point to a bill of $2 billion for Citigroup, which is hardly going to help the troubled giant to step up lending.
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But the politics of the tax are attractive. The economics stacks up too. One of the best arguments for the levy is that it makes the price of wholesale funding more accurately reflect the real risks involved.
As Anatole Kaletsky argued earlier this week, the fact is that, in certain circumstances, all banks will be too big to fail. Lenders to banks will know they are likely to be bailed out if it all goes pear-shaped, which means they will be prepared to lend more cheaply than they would otherwise.
By increasing the price of wholesale funding to the banks, the levy would discourage banks from taking excessive risks and growing their balance sheets too far. By exempting banks with assets of less than $50 billion, Washington is also introducing the tax on size that many regulators have advocated.
The design of the levy appears to create an incentive for foreign banks to move funding outside the US. This is hardly good news for Britain, where there is already an excess of bank debt that needs refinancing.
It would be a surprise if some people in Government were not already contemplating the obvious solution. Introducing just such a levy here.