David Prosser: Piling on the pain for the banking industry

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The Independent Online

Outlook Another bad week for the world's banks, with the Goldman affair having further tarnished their already battered reputations, just got considerably worse. On any measure, the IMF's proposals for two new levies on the banks – made in response to a request from the G20 for a blueprint for new taxes – are considerably more draconian than even the City's pessimists feared. Look at the quantum for starters. The IMF's suggestion is for the levies to raise 2 to 4 per cent of gross domestic product over the long term: on last year's £1.4trillion for the UK, that means the banks handing over between £28bn and £56bn. We can argue about the definition of long-term, but even if the IMF were to give them 10 years to pay, you'd be looking at a bill of several billion pounds each year.

Then there's the structure of the levies. The banking industry had expected some sort of tax on its liabilities (not that this will stop it protesting) but an additional levy on pay and profits was a nasty shock. The UK's tax on bonuses, introduced for one year only in November's pre-Budget report, was intended to deter the banks from offering excessive rewards to staff – partly to appease public opinion, it must be said, but more importantly so as to leave them with greater funds to bolster capital. This new tax on pay and profits will, by definition, make it tougher to achieve that goal just as more stringent rules on capital and liquidity are likely to come into force courtesy of the review that is close to being concluded in Basel by the Bank for International Settlements.

The only silver lining for the banks is that others will share their pain. Having played no real part in the financial crisis, hedge funds and particularly insurers, both of which the IMF says should also have to pay these taxes, will feel sore about being asked to help the banks meet the bill. The IMF's only justification for this seems to be its concern that banks will otherwise restructure as hedge funds or insurance companies.