Europe Plans New Banking Levy

Published in Investing on 26 May 2010

Yes, it's another new tax on banks.

Last month, I wrote about the International Monetary Fund's case for two new taxes on the world's banks. The IMF proposed a flat tax linked to the size of banks' balance sheets, plus an additional 'FAT' tax on excessive banking profits.

Now the EU wades in

Today, the European Union's internal market commissioner, Michel Barnier, waded into the bank-bashing debate. Arguing that "prevention is better than cure", the French politician has urged EU members to introduce national bail-out funds so that the cost of future bank failures is not met by taxpayers.

To create these bail-out funds and prevent future financial crises, M. Barnier proposes a new levy on banks. However, these funds would not be used to bail out banks, but to manage bank failures in an orderly fashion. In other words, they would be used to provide liquidity and lines of credit in order to wind up a troubled bank without the spread of 'financial contagion'.

Like many other critics of the 'Anglo-Saxon banking collapse', M. Barnier believes in the 'polluter pays' principle. In other words, banks (and bank-like institutions) get themselves into these messes, so they should be the ones to pay for future rescues. Likewise, such bail-out funds should not be used to compensate a failed bank's shareholders or its unsecured creditors.

Instead of a Europe-wide fund, the EU proposes the introduction of harmonised regulation and levies that still allow each country's regulators to deal with insolvent financial institutions at a national level.

What's more, he argues that these new levies should not be passed onto customers in the form of wider interest margins or higher charges. Were this to be the case, banks would earn a lower return on their equity, which means lower profits and dividends for their shareholders.

How have banking shares reacted?

On a very strong day for world markets, British banks seem to have shrugged off this latest attack on their profitability, judging from the reaction of their share prices:

Barclays (LSE: BARC)+4.6
HSBC Holdings (LSE: HSBA)-0.3
Lloyds Banking Group (LSE: LLOY)+6.7
Royal Bank of Scotland (LSE: RBS)+5.6
Standard Chartered (LSE: STAN)+2.0

What next?

The big problem with this (and similar) proposals is that it fails to tackle the problem of 'moral hazard', whereby banks take excessive risks, knowing that they have the protection of a safety-net. Indeed, by reducing the consequences of excessive risk-taking, these bail-out funds could have the opposite effect to that intended.

That said, the EU seems keen to push ahead with this proposal, which will be presented at the G20 group of nations summit next month. Any draft EU law governing bail-out funds would not be proposed in the European Parliament until next year, so this is one for banks to watch.

In the meantime, similar measures have been proposed to rein in European hedge funds, and separate Bills overhauling US banking regulation are working their way through the US Senate and the House of Representatives.

Can anyone hear the slam of stable doors closing after the horses have bolted?

More from Cliff D'Arcy:

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BrettHeth 27 May 2010 , 1:18pm

This is an idea whose time has come.

Finally, someone with (at least a bit of) power has spoken out with a logical proposal to make irresponsible greed in the finance world more difficult.

I believe there must first be a way to ensure that any new levies are not simply passed on to consumers in the form of higher fees or in-built secretive charges.

gordonbanks42 27 May 2010 , 11:14pm

Another case in which what is politically possible is likely to produce unhelpful consequences.

Worse, I suspect that Barnier is trying to use EU policy as a vehicle for getting one over on Britain and the USA.

RobinnBanks 28 May 2010 , 12:03am

So banks are to be made to pay into a fund which will be used to wind them up if they fail? They will not like that, and would be better off not contributing.

giveusaquid 28 May 2010 , 1:54pm

I think I'm too idealist to be reading these articles.
Am I the only one who finds it insane that we now seem to be trying to regulate banks and big businesses based on a fundamental acceptance that they will almost certainly try any and every loophole to get around legislation that is trying to rein in excessive greed and corruption?

The thing with loopholes is...they are loopholes! The clue is in the name, if you've found a sneaky way round a rule that alone should tell you that you probably shouldn't be doing it.

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