Previously I have described proposals for a global tax on banks and bankers as an empty gesture by desperate politicians. That view was confirmed here in St Andrews, Scotland, when Gordon Brown, the UK prime minister, sought to upstage the G20 meeting with a call for a global financial transactions levy.
“It cannot be acceptable that the benefits of success in [banking] are reaped by the few but the costs of its failure are borne by all of us”
Who could disagree with that? Well, no one, and that is why Brown used that form of words. But, as ever with Brown, you have to read all his words carefully. The idea is still going nowhere.
As I have written before, the idea of making banks pay a fee for the implicit insurance they receive from taxpayers is something of a counsel of despair. It means the authorities believe they will fail to solve the “too important to fail” problem. And many different policies sit under this umbrella.
In giving the impression he was calling for a global transactions tax, Brown actually said:
“There have been proposals for an insurance fee to reflect systemic risk or a resolution fund or contingent capital arrangements or a global financial transactions levy.”
These are four very distinct proposals, one that has already started, two that countries might choose to undertake, perhaps alone, and the levy that is going nowhere.
- An insurance fee to reflect systemic risk is essentially the idea, popular in the US and elsewhere, that systemically important banks should hold more capital than systemically irrelevant banks;
- A resolution fund is essentially pre-funded bank-bailout fund. Presumably, bank customers would pay this up front rather than taxpayers after a crisis, but it is unlikely ever to be sufficiently large to pay for a crisis of 2008-09 proportions.
- Contingent capital is already happening. This week Lloyds Banking Group proposed to convert its existing subordinated debt into contingent capital.
- And the global financial transactions levy is not under active discussion because important countries will not agree. A G7 official here in Scotland, using the typically understated language of diplomacy, described the chances of getting agreement globally as “challenging”. Without a global agreement there will be no transactions levy.
So the idea will rumble on, pushed by politicians who want to sound tough on banks, and it will continue to detract from the real business of trying to secure much better regulation and oversight of banks in future.
One final thought for those in the UK. Just imagine if Tony Blair had arrived uninvited when Gordon Brown was chairing a G7 finance ministers’ meeting and upstaged the agenda by talking about things that had been kicked into the long grass. Brown would have exploded. Alistair Darling is a little more grown up, but his boss has again made his job more complicated than necessary.
