Banks Reject Bailout Tax Proposals

by Mike Godfrey, Tax-News.com, Washington

28 April 2010

The Institute of International Finance (IIF) has told G20 leaders that it sees "no merit" in proposals for a global bank tax.

Charles Dallara, managing director of the IIF, stated in a letter to Ministers and Governors of the G20 that there is an "urgent need to develop a new regime to deal with the resolution of failing cross-border institutions to ensure there is no recourse to taxpayers." However, the letter goes on to argue that there is "no merit in the idea that any levy on the financial sector should be paid into general revenue."

"Neither do we believe that an ex ante levy on the banking system should be used to finance the bailing out or recapitalization of failing institutions," Dallara wrote.

"Instead, we believe that there is a need to develop conditions in which no institution, regardless of its size, complexity, interconnectedness or geographic reach should be seen as too systemic to fail," he added. "That requires the creation of effective mechanisms for resolving failing cross-border firms which would likely involve ex post funding by the financial sector."

Formed in 1983, the IIF is a global association of financial institutions, which counts most of the world's largest commercial and investment banks among its membership, in addition to a number of insurance companies and investment management firms.

Dallara stated that financial institutions should be allowed to fail in a way which "neither creates systemic trauma nor requires the use of taxpayers' money to forestall failure." The IIF suggests that shareholders and unsecured creditors need to bear the brunt of failure and that this needs to be "rigorously enforced."

The IIF also wants to see "special resolution regimes" for financial institutions and greater coordination between national regulatory systems to address complexities arising out of the global distribution of a failed bank's assets and liabilities.

The G20 is due to discuss the International Monetary Fund's proposals for an international banking sector levy at its June economic summit.

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