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Banks face fresh hit from IMF twin tax

Source: Reuters - Tue 27th Apr 2010

To embellish Benjamin Franklin's quote: "In this world, nothing is certain but death and bank taxes."

Sure enough, European and U.S. banks could pay over $35 billion (23 billion pounds) a year under twin taxes proposed by the International Monetary Fund to recoup some of the rescue costs of the financial crisis - and help prevent a repeat.

Support for a global bank levy has built since the United States in January proposed a 0.15 percent charge that could raise $90 billion to $117 billion over a decade.

A tax on banks is seen as inevitable following a wave of government proposals to claw back billions of dollars and euros of taxpayer cash used to bail out the industry. How to structure a levy and smooth it across borders will be a key challenge for world leaders in the next two months.

"We estimate that a U.S.-style tax on the Europeans could raise up to 19 billion euros ... and potentially knock 6-10 percent off normalised profits" Keefe, Bruyette & Woods analyst Andrew Stimpson estimated.

The impact could range from 1 percent of profits to 21 percent, he said, with Dexia worst placed and RBS and Credit Agricole also ranking poorly.

Other banks with big balance sheets would be negatively affected, such as Deutsche Bank and BNP Paribas, while the least impacted should be deposit-rich banks, such as those in Spain and Italy, analysts said.


The IMF suggests a two-pronged approach: a levy on the liabilities of financial firms to cover the cost of any future bailouts and an extra tax on profits and pay.

It is the extra levy - dubbed a "financial activities tax", or FAT - that surprised bankers and added heat to a row that has raged since most of the industry rebounded from a two-year financial crisis with bumper profits and bonuses for staff.

"It is potentially more onerous and potentially more wide-ranging but it would be premature to take away a radically negative conclusion" said Ian Gordon, analyst at Exane BNP Paribas in London. "A two-pronged approach wasn't expected, but we don't yet have any better idea on quantum."

The FAT proposal was unwelcome for the sector, and may penalise successful banks rather that risky behaviour, but was not a surprise given lawmakers' mood to curb excessive profits and payouts in the industry, analysts said.

The FAT would be levied on the sum of the profits and remuneration of banks. How countries define each would determine its impact, but a 2-percent FAT in Britain could raise 0.1-0.2 percent of gross domestic product.

The IMF suggests the first levy - or financial stability contribution - could raise 2-4 percent of GDP. A flat initial charge would be refined over time to reflect where risk lay.

A levy similar to a U.S. proposal, with national refinements to adjust for derivatives, capital, deposits and other factors, appears most likely, analysts said. They put the cost for Europe's banks at between 13 billion and 50 billion euros (11 billion and 43 billion pounds).

"We would not be buying into the sector until it becomes clear where the regulatory goal posts are going to be moved to" noted Bruce Packard, analyst at Seymour Pierce.

The IMF's move helped assuage government fears they risked a "first mover disadvantage" by addressing a tax ahead of peers, said Jan Putnis, a partner at UK law firm Slaughter and May.

But he said there was little in the proposals to discourage banks from taking many of the risks that led to the crisis, and some lawyers warned that as returns are dented, banks may chase riskier opportunities knowing there might be a fund, stuffed with bank taxes, to bail them out.

The IMF said directly supporting banks had cost an average of 2.7 percent of GDP across G20 countries. It was as high as 5.4 percent in Britain, 4.8 percent in Germany and 3.6 percent in the United States.

News that Goldman Sachs has earmarked an average of $166,000 for each employee for the first three months of this year stoked criticism that bankers reap the profits while taxpayers bear the cost of failure.

Britain, which was first to propose a global levy, welcomed the IMF move and is hopeful of clinching agreement. But others, such as Japan and Canada, whose banks avoided problems in the financial crisis, oppose it.

A senior Canadian official doubted there would be wide support across G20 countries as priority should be on toughening capital standards - which could be at risk of getting crowded out by ideas such as a bank levy.

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