Powerful Banking Group Rejects Global Reform Plan

A number of the finance ministers and central bank managers in Europe support creating a bank tax to handle financial firm bailouts in the future. A related levy has been discussed by some members of Congress to build a $50 billion fund to take care of the cost of bank “wind downs” in the US.  Most of these plans have been supported by an analysis of the problem by the IMF

The head of the The Institute of International Finance, an association which represents the world’s largest banks expressed strong objections to the taxes in a letter to the government representatives at the G20 Conference.

The IIF used an already widely discussed argument that any mechanism to fund the bail out of banks creates a “moral hazard.” Banks will take on excessive risks if their managements know that a rescue fund exists. In a letter from IIF Managing Director Charles Dallara to the Governors and Ministers of the Group of 20, he wrote that shareholders and bond holders should bear the costs of bank failures. He said that a bank tax would subvert the reasons for tax systems which are not to create funds for unanticipated catastrophes. He added say that taxes created by a number of nations would almost certainly vary by country. This would mean that rewards and penalties would be established that would not apply evenly to financial firms. The disparity, in turn,  would make risk incentives and penalties which are not uniform.

The IIF reaction is predictable. The world’s largest banks want to avoid as much regulation as possible and do not want the system to do anything that will undermine their earnings and ability to improve their balance sheets.

The disarray among the G-20 nations to create a bank tax that operates across borders and in most developed nations favors the IIF. The plans that the Congress is debating have some aspects that are not in common with proposals within the European union.

Politics and not economic analysis will turn out the be the IIF’s greatest ally

Douglas A. McIntyre