Britain and France called yesterday for a new global tax on financial transactions to mitigate the impact of climate change.
In a joint statement, Prime Minister Gordon Brown and the French President, Nicolas Sarkozy, said: "To ensure predictable and additional finance in the medium term to 2020 and beyond, we should make use of innovative financing mechanisms, such as the use of revenues from a global financial transactions tax."
Their remarks came as the Financial Services Authority proposed fresh curbs on banks, including "capital buffers" to protect against recession and a tough "stress-testing regime" to ensure they could cope with another downturn. The City watchdog accused Britain's lenders of a "failure of imagination" in the past.
Until now, the so-called "Tobin tax" on transactions – named after the economist who first conceived the idea – has been seen as a possible way to provide a global pool of capital to protect against bank failures. Pushed by Britain in particular, it has not got far largely because of opposition from the US and concerns about how a "global" fund would work in practice.
Using such a tax to pay for measures to cut climate change, as the two leaders suggested yesterday, is new. But the EU has already suggested it as one idea the International Monetary Fund should consider as it works on plans on how the world should respond to the financial crisis.
Britain and France said they would raise up to £1.5bn, much of which would go to help poor countries deal with the impact of climate change. They also suggested a levy on air travel and shipping.
But banks have warned that the weight of new restrictions they face, in terms of taxes and requirements to hold capital, could hamper economic growth and curb new lending.
The FSA said it wanted to see banks testing their business models against the impact of recession, which could mean they have to set aside much more cash. The regulator will require banks to envisage "plausible economic scenarios" and assess the impact on their businesses.
Lenders will also have to apply "reverse tests" – i.e. consider themselves bankrupt, then work back from that point to assess how they got there. They will be required to show they can maintain a minimum level of capital even through a deep recession and to set aside extra "buffers" to ensure this is the case.
Paul Sharma, the FSA's director of prudential policy, said: "There has been a failure of imagination on the part of the banks. All too often in previous stress tests they would work through a scenario, come back and say, well if that happens we will catch a bit of a cold. That cannot continue.
"There needs to be a fundamental improvement. In future, we will give them scenarios to work through and also require them to work backwards from bankruptcy."
Paul Chisnall, the executive director of the British Bankers' Association, said: "We really are now getting to the stage where we have to put together all the proposals and do a proper impact assessment.
"We are getting to the stage where, taken together, all the measures in terms of capital that banks are being asked to put in place could now have an impact on economic growth."
Mr Chisnall said it would be difficult to secure international agreement for a Tobin tax, and warned that it would be yet another capital burden on the banks at a time when cash for new lending was desperately needed.Reuse content