The proposal to put a levy on banks to recover the cost of the TARP seems muddled, though we don’t have the details just yet.
The administration is looking at a levy on the top 20-30 banks that would be risk-weighted and would aim to recoup the full ultimate cost of the Tarp bailout fund to taxpayers–even though a large chunk of this represents the cost of home foreclosure relief and the auto industry bailout rather than financial rescues.
Administration officials currently estimate the TARP cost at $120bn, though they expect the actual number will be lower than this. Rather than fix the total amount up front, they plan to indicate how much they will raise in each of the coming years, with a sunset clause to end the payment once the bailout costs are fully recouped.
The idea is obviously to gather revenues, gratify the public’s fury at bank profits and bonuses, and maybe also tilt the playing field against banks that are too big to fail. Reasonable objectives, but probably too many for one shrewd stroke.
Raising revenue is fine. The next budget needs to do that, and a tax to recoup the TARP shortfall helps. Also, people are right to be angry at bank pay. But this tax acts indirectly on that problem at best. Its burden will be shared with owners (current owners, not the ones who failed to exercise discipline during the bubble and were rescued) and customers. So far as pay is concerned, it is beside the point–and where is the justice? We need either new regulation, or higher taxes on the pay itself, or both.
Excessive bonuses are an affront, to be sure, but bank profits are a different matter. They were supposed to be part of the solution, weren’t they? We want banks to be profitable, so long as they use their profits to restore capital. The tax does not advance that prospect, either.
Perhaps it might make the system safer next time, nonetheless, by punishing big banks disproportionately and encouraging the industry to downsize. According to how the tax is scaled, it could work that way. But again this approach is indirect. Because the tax has the appearance of an ad hoc temporary measure, driven by a short-term political need, it fails to set clear rules going forward.
Much more demanding capital requirements would be far more effective. A supporter of the tax might ask, why not have both? Here’s one reason. If the tax satisfies the political demand to get tough with the banks, then the chances of a more demanding permanent capital regime–which the banks will resist even more fiercely than this temporary levy–will be reduced.