The International Monetary Fund was asked by the G20 some time ago to look at options for additional taxes on banks. So its report is hardly surprising. What is new is that it has proposed two different types of taxes: one for stability and one on financial activity. And they would be levied on financial institutions beyond the banking industry.
It is good to see the IMF recognises that whilst the banks have been the focus of most public criticism, they are not the only financial institutions. But it is not clear-cut. Europe's finance ministers displayed differences at their meeting last week. Some wanted an additional levy or tax on financial services to pay for an intervention fund against future crises. Others wanted the same to fill their national budget shortfalls. The IMF has cleverly covered both options.
But what are these proposed taxes really designed for? British banks have already progressed significantly on reform, not just holding more capital and more cash for stability purposes, but also implementing resolution and recovery plans so they won't need to call on the taxpayer if they face problems.
Regulation is already curtailing activities perceived to be too risky. And – here in the UK, certainly – pay is already regulated. So the IMF proposals look like a fourth way of tackling the same issue: risk. No one would argue that banks need to take properly controlled risks. They borrow short-term and lend long-term: that is, they allow depositors to access their savings on demand, but they lend over longer periods. Any changes need to recognise this central economic role that banks play.
We need to recognise that banks are at the table for change; that tax changes need to be carefully and coherently thought through from both a technical and a policy perspective; and that if we are to have additional taxes, they must be coordinated internationally, implemented in the same way and designed so that their impact does not have an adverse consequence on the economy. There is a real threat to the UK as a premier financial centre. The imposition of multiple taxes and regulations risk cumulatively making the UK a less attractive place for companies.
However well a tax is designed it will also have an impact on the economy because of the fact that you cannot increase the fixed operating costs of any company (which is what tax does) and expect it to have no consequences on the price and availability of the products (which in the case of banks is the supply of credit).
The writer is chief executive of the British Bankers' AssociationReuse content