June 2, 2010 / 6:00 AM / in 7 years

Q+A - G20 efforts to agree a bank tax

LONDON (Reuters) - Finance ministers and central bankers from the G20 group of countries meet in Busan, Korea on June 4-5 to discuss progress in implementing their pledges to make the world’s financial system safer.

G20 Finance Ministers and Central Bank Governors sit for a group photo at the start of the International Monetary Fund/World Bank Spring Meetings at IMF headquarters in Washington, April 23, 2010. REUTERS/Jonathan Ernst

Their leaders have agreed that banks should be made to pay for bailing out the sector in a future crisis so they can no longer believe they are “too big to fail” or that taxpayers will always be there to rescue them.

WHAT‘S BEEN PROPOSED AT THE GLOBAL LEVEL?

The International Monetary Fund has proposed two new taxes on banks: a financial stability contribution (FSC) would be linked to a resolution mechanism to pay for the fiscal cost of any future government support to the sector. The IMF says any further contributions, if desired, should be raised by a financial activities tax (FAT) levied on the profits and remuneration of financial institutions.

The FAT tax could raise amounts equivalent to 0.2 percent to 0.4 percent of a country’s gross domestic product, and the FSC tax could build up a fund equivalent to 2 to 4 percent. The current crisis has cost G20 countries about 2.7 percent of GDP.

IS THE IMF PLAN THE ONLY GAME IN TOWN?

Not by a long chalk.

Sweden has already introduced a levy on banks that goes into a ringfenced fund. Germany is formulating a similar measure and Britain’s new coalition government has said it wants to introduce a bank levy.

U.S. President Barack Obama has proposed a levy to recoup $90 billion of public money used so far to shore up banks.

This week the European Union’s financial services chief Michel Barnier outlined plans for a levy on banks to build up dedicated resolution funds in each of the 27 EU states.

IS A GLOBAL LEVY NOW IN THE BAG?

Far from it.

While there is support in Europe and the United States for some form of levy, Canada and other parts of the world such as Australia feel their banks should not be penalised with an extra tax as they did not require rescuing.

Apart from some opposition to the principle of a tax, there is also disagreement over its scope and use.

Sweden and Germany back a dedicated fund for winding up banks in a future crisis. Britain and France want money raised by a levy to go directly into the treasury. The U.S. plan is only for recouping taxpayer aid in the current crisis and then it would expire.

Some central bankers and countries like Britain and France are against building up funds for a future crisis, saying it creates “moral hazard” by potentially encouraging banks to be risky, knowing there are funds at hand to bail them out.

At the last G20 finance ministers’ meeting in Washington in April, the IMF was asked to do more work on its levy proposal.

The betting is that no single, uniform global bank levy will be agreed and that G20 members can tailor a levy to their own national circumstances, with some countries not imposing one at all, raising the prospect of competitive distortions and loopholes.

DEAL IN SEOUL?

Some G20 leaders want a deal on tax by the Seoul summit in November. Some policymakers already fear a long debate over a levy will sap momentum in implementing core G20 pledges to make the financial system safer, particularly the introduction of tougher Basel III bank capital and liquidity requirements.

A tax would win backing from a public angry with how banks have messed up the economy, but making it work and universal won’t be easy or quick.

Banks already complain that Basel III alone will be overly burdensome and threatens to derail economic recovery. Topping this up with new taxes will only reinforce these views and hamper G20 attempts to achieve consensus on a tax.

R.I.P TOBIN TAX?

A Tobin-style tax on financial transactions -- named after the U.S. economist James Tobin who came up with the original idea in the 1970s but which was never adopted globally -- was rejected last year by the United States, effectively sealing its fate.

The IMF has said a transaction tax won’t work but some German politicians are still pressing for one.

(Reporting by Huw Jones, editing by Stephen Nisbet)

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