We have already identified the new rules and tools required for financial stability and should move on to prioritising our options. This was the implicit message in a speech given last night by Mervyn King, as he said we would need several options working together, and proposed a criterion by which to rank them:
The guiding principle of any change should be to ensure that the costs of maturity transformation – the costs of periodic financial crises – fall on those who enjoy the benefits of maturity transformation – the reduced cost of financial intermediation. All proposals should be evaluated by this simple criterion.
There are no silver bullets, says Mr King. Key suggestions – such as a permanent bank levy or limits on leverage – each add something, but are insufficient alone to prevent another crisis. Additional capital requirements, special resolution regimes and contingent capital also get a mention, underscoring the variety and breadth of proposed solutions.
More radical solutions – such as ‘limited purpose’ banking or functional separation – receive a more cautious treatment Read more
£2bn, €1bn… and $19bn. Proposed bank levies so far from the UK, France and US. The tide of ever smaller bank levies appears to be turning.
American banks with assets exceeding $50bn and hedge funds with assets over $10bn would be liable to pay the costs associated with financial reform. This from a proposal by Barney Frank late last night during discussions to finalise Wall Street reform. More on ft.com.
France is aiming for a bank levy of €300m but ” would really like” €1bn, French finance minister Christine Lagarde has announced. Yikes. George Osborne’s feat — taxing the banks £2bn while reassuring them of a level playing field — seems a little less impressive. Might this put Mr Osborne off considering further bank levies?
Lucky for UK banks, then, that the UK levy is so small. And largely offset by corporation tax gains.
The new US bank levy will fall on uninsured debt – ie assets minus insured deposits minus equity. That makes a lot of sense.
Banks paid a premium to insure the insured deposits – these liabilities were always supposed to be insured against loss by the government via the FDIC. Read more
Special taxes on banks are catching on – but moves around the world are disparate and show few signs of coordination so far, either in detail or in ambition.
In all of this, the big effort globally is to ensure banks have greater buffers against failure (higher capital) and that the authorities work to getin tinto a position where bad banks can fail (to minimise the implicit state insurance), but also to get banks to pay for the residual insurance that taxpayers are likely to provide for future systemic crises.