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March 26, 2014

How to use a bank tax to make the financial system safer

“A tax on the balance sheets of big banks – first proposed by US President Barack Obama in 2010 but later shelved – is back on the political agenda. Last month Dave Camp, Republican chairman of the House of Representatives ways and means committee, put forward a proposal for tax reform that included a 0.035 per cent levy on bank assets more than $500bn. This would hit large institutions such as Bank of America, Citigroup and Goldman Sachs.

“The aim of the Republican plan is to find tax revenue that could be used to offset cuts in income taxes on individuals. Mr Obama pitched his proposal as a way of raising money from US banks to help repay taxpayers who had to bail them out at the height of the crisis. Neither plan aims to make the financial system safer, and neither would. But with a few alterations, a balance-sheet tax could help strengthen the banks.

“When financial institutions get into trouble, it is usually because they have borrowed too much, leaving them at risk of becoming insolvent if their assets decline in value. When banks have too much debt, losses can be crippling even if they are not very large. This is why regulators have been insisting that banks stop relying so heavily on debt financing, and instead build up a bigger cushion of loss-absorbing capital.”

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Read full Financial Times article here.

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