Geithner Pushes US Bank Tax

by Mike Godfrey, Tax-News.com, Washington

06 May 2010

US Treasury Secretary Tim Geithner told a Senate hearing on May 4 that the cost of the administration's proposed financial sector levy will not be passed on by banks to borrowers because they would risk losing market share to institutions which do not have to pay the levy.

Talking about the proposed Financial Crisis Responsibility Fee, which will penalize the largest institutions taking on the most debt, Geithner told the Senate Finance Committee that the measure has been designed so that "it would fall most heavily on firms that fund riskier activities with less stable forms of funding."

"Firms would pay a fixed percentage of their assets adjusted for risk, minus their capital, insured deposits, and certain insurance policy reserves," Geithner explained during his testimony. "Firms that take on more risk and fund those activities with less stable sources of financing would pay more than firms that are managed more conservatively. This framework has the significant benefit of including derivatives and off-balance sheet items not otherwise reflected under conventional accounting. In this way, the fee targets, and thereby would help discourage, activities that pose the most risk to the stability of the financial system. 

According to Geithner, because the fee covers only those institutions worth USD50bn or more who took money from the Troubled Asset Relief Program (TARP), it excludes over 99% of US banks, which currently provide the majority of small loans to businesses and farms across the country.

"If covered firms try to pass on the costs of the fee to their borrowers, they will lose market share to other institutions.  The Congressional Budget Office, in its review of our proposal, highlighted these advantages by noting that the proposal 'would improve the competitive position of small- and medium-size banks, probably leading to some increase in their share of the loan market,'" Geithner told the panel.

The hearing was the second in a series the Finance Committee is holding to consider the administration’s bank tax proposal and alternative structures to recover TARP losses on behalf of American taxpayers.

“American taxpayers deserve to have each and every dollar spent in the TARP program paid back, and financial institutions need to bear responsibility for the burden they created,” commented Finance Committee Chairman Max Baucus, a Montana Democrat.

“TARP helped to keep the financial sector afloat and there’s a decent argument that the financial sector received more benefit from TARP than just the dollars that TARP lent them," Baucus added. "Small businesses suffered when credit dried up during the financial crisis, so we want to make sure that banks do not harm small businesses when we try to make the banks pay back American taxpayers.”

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