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.
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.