The International Monetary Fund is studying a possible levy on banks based on their importance and “interconnectedness” to the world economy, part of its push for a coordinated global response to the financial crisis amid concern about the scattershot nature of proposals being offered in different countries.
Elements of the idea, which would force financial institutions to set aside more capital based on a measure of the “systemic risk” they pose to the larger economy, have been included in different proposals made in the United States and Europe.
But those financial reform discussions also have included a host of other ideas — from a broad bank tax endorsed by the leaders of France and Germany to the “crisis responsibility fee” proposed by President Obama to recoup from financial firms the money that taxpayers provided to prop them up. Privately, IMF officials have expressed concern that such proposals fail to address what they see as a central obligation — identifying institutions that pose systemic danger and either regulating them better or discouraging them from growing too big and complex in the first place.
The issue will be central to upcoming discussions among world financial leaders about how to amend their national laws while making sure those changes mesh into a system in which similar rules are in place in all the world’s major financial centers. There has been division over basic aspects of how and what to change, with the United States arguing that Europe has not done enough to ensure the health of its major banks, Europe saying the United States is too lax in its approach to regulating hedge funds and risky derivatives investments, and politicians across the spectrum arguing for different taxes, regulations and penalties.
To advance and focus the debate, the IMF on Tuesday released two reports about how to structure a capital surcharge that would rise or fall based on how much risk a given institution is facing and how much peripheral damage it would do if it collapsed. The surcharge would not be a tax paid to governments, but money the institution would have to set aside if it engaged in riskier practices or grew too large and interwoven with other companies.
It could involve sizable sums: An IMF staff paper projected that an appropriate capital charge for Citigroup, for example, would be roughly $300 billion because of the bank’s size and the major ramifications if it were to fail. Tabulated from February 2009 data, the charge would amount to nearly 16 percent of the value of the bank’s assets — a stiff levy that IMF economists say would provide a buffer in the event of a downturn but also encourage bank officials to manage more cautiously.
Banks are already required to maintain minimum capital levels based on local and national rules. But the crisis showed those to be inadequate, particularly in cases of institutions that had complex investments and a vast web of global connections.
The IMF has no authority to impose such a fee. But it is advising major governments about how to shape post-crisis regulations, and in particular it has been urging that the response be coordinated. The fund is preparing separate studies of taxes and other reform ideas that will be debated during its spring meeting and during the June meeting of officials from the Group of 20 economically influential countries.
U.S. officials in particular have worried that it may prove difficult to persuade Europe’s disparate nations to adopt common rules that their large and influential national banks may oppose. In an opinion article in Tuesday’s Washington Post, Treasury Secretary Timothy F. Geithner raised that concern, urging adoption of a pending Senate financial reform plan because it would give the United States “a strong hand in negotiating a global agreement on new capital requirements.”
The financial reform legislation proposed by Sen. Christopher J. Dodd (D-Conn.) includes establishment of a Financial Stability Oversight Council that would impose “increasingly stringent rules on companies that grow large and complex enough to pose a threat.” A Senate aide, who spoke on the condition of anonymity because negotiations on the bill are ongoing, said that lawmakers hope to set “a high bar and others will follow.”
IMF officials were careful to note that the agency was “not necessarily endorsing” the idea of what one agency study dubbed the “Too-Connected-to-Fail” charge. That’s a variation on the theory that the United States and other governments propped up large banks and companies such as insurance giant American International Group out of concern they were “too big to fail.” The IMF hopes to shift the focus from size alone to “connectedness” and to develop methods to measure the interdependence of financial institutions around the world and assess more fully the costs of a failure.
With the global economy beginning to recover, “the next steps are much more difficult,” Laura Kodres, head of the IMF’s global financial stability division, said in a news conference Tuesday at which the agency released portions of its latest Global Financial Stability Report, including a detailed analysis of how to implement a capital levy based on an institution’s “systemic interconnectedness.”
“The crisis showed that the safety and soundness of individual institutions is not enough to prevent a breakdown,” Kodres said. “There are risks to the financial system that result from the interaction of institutions.”
By Howard Schneider
Tags: barack obama, economic recovery, economy, financial crisis, financial markets, Global Economy
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