IMF bank levy plans will not catch hedge funds, say critics

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A long-awaited International Monetary Fund (IMF) report written for the upcoming G20 talks endorsed a bank levy but cautioned against a transactions tax to fund future bailouts. Critics, however, argue that such a levy will push financial activity towards hedge funds, heightening systemic risk.

The finance ministers of the G20 nations will meet in Washington this Friday to discuss the results of a report written by the IMF on how countries can prevent systemic risk in the financial sector and fund future bailouts.

The IMF belatedly released a paper on Tuesday (20 April) designed to inform these discussions. The paper clearly supports a bank levy but warns that a financial transactions tax (FTT) would not be "well suited to the specific purposes set out by G20 leaders".

Sources privy to recent talks between ministers say that US Treasury Secretary Tim Geithner explicitly told the IMF's head, Dominique Strauss Kahn, not to include the FTT as a viable option in the report.

Counter paper

The report endorses a levy that would initially be calculated at a flat rate, later refined to reflect institutions' riskiness and their contribution to systemic risk.

But to avoid levies, borrowing and lending activity will likely shift to the shadow banking system, including hedge funds, which will increase systemic risk, argues Sony Kapoor, an ex-Lehman banker and founder of the think-tank Re-Define.

"Implementing bank levies alone, without taxing financial transactions, risks pushing financial activities into the shadow banking system," Kapoor writes in a counter paper to the IMF report.

The paper makes the case for an FTT, which it says would not only raise more revenue than a levy but would also target shadow banking transactions in hedge funds, investment banks and the like.

An FTT would also in turn penalise opaque and complex banking like derivatives trading, deemed responsible for the accumulation of risk in the sector.

Hedge funds and other alternative asset managers argue that they were not responsible for the collapse of the banking sector.

However, recent allegations of fraud seem to contradict their innocence, after Goldman Sachs was accused by the American regulator of colluding with a hedge fund to make millions on the collapse of sub-prime mortgages (EURACTIV 20/04/10).

FTT out of the running?

According to the IMF's calculations, an FTT would not be the best way to finance a resolution mechanism as it would not target core sources of instability, like institution size, and it would eventually penalise customers and not earnings.

In the EU, plans for an FTT recently lost credibility when an internal paper written by the bloc's finance ministries said a tax would be costly for business and government alike and would be ineffective in fighting speculators (EURACTIV 14/04/10).

The Japanese finance minister, Naota Kan, left no doubt that he would not support any kind of levy or tax on banks in a statement on Tuesday (20 April).

"The EU and the US have their ideas and Japan has its own ideas," the minister said.

The Obama administration in the US has drawn up plans to introduce a bank levy charged to lenders with assets exceeding $50 billion.

Currently the so-called Dodd Bill faces staunch opposition from all 41 Republican members of the US Senate.

"There is sufficient evidence and independent analysis available that should convince ministers that the FTT will contribute to financial stability while at the same time generating approximately the equivalent of 2% of global gross domestic product," argues an international alliance of Catholic development agencies, CIDSE.

The European Savings Bank Group said that its members did not cause the crisis and therefore do not see why they should be paying for the irresponsible behaviour of other financial institutions.

"ESBG members have never abandoned their support to the real economy and have been returning a part of their profits to society since their creation," the association said in a statement.

"The IMF, in calling for a backward-looking tax, sends a message that if a single 'one-off' bill is picked up by the banks, then everything can go back to the way it was. The preventative measures proposed [by the IMF] to ensure this mess can never happen again are far too weak," said Poul Nyrup Rasmussen, president of the Party of European Socialists.

Multitrillion bailouts of failing banks have emptied government coffers as they struggle to recover the costs of the recession. The EU is lagging behind the US in a slow recovery, while emerging markets in Asia, like China and India, continue to overtake Western economies.

To find ways to recover bailout costs, the G20 gave the International Monetary Fund (IMF) a mandate to evaluate various taxes and levies that could be imposed on the banking sector in the near future.

The EU has been wavering between a bank levy and a financial transactions tax – based on the more widely known Tobin Tax – while the US has staunchly favoured a bank levy.

Finance ministers will engage in a series of meeting to discuss the proposals. The next official G20 summit of world leaders will take place in Toronto on 26-27 June.

  • 23 April: World finance ministers meet in Washington to discuss plans to tax banks.
  • 26-27 June: World leaders meet at the next G20 meeting in Toronto.

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