Banks were were last night warned that they face a double tax hit to pay for future bailouts, in proposals tabled by the International Monetary Fund.
The IMF said that the direct costs of financial failures should be "contained and covered" by a new Financial Stability Contribution (FSC), together with a Financial Activities Tax (FAT) to be paid into general government revenues.
The proposals are far more radical than had many had suggested, and are set to face furious resistance from a banking sector that has so far met any reform proposals with fierce criticism, despite the billions that taxpayers have had to pump in to keep the sector afloat. The IMF said the FSC should be linked to a "credible and effective resolution mechanism" to cover the cost of future bailouts. It would contain two main components, the larger being a levy to provide for a fund to support the financial sector and help reduce excessive risk-taking.
A second, smaller component would be a fee to pay for the availability of government credit lines to ensure that banks' gross financing needs can be met if the cash generated through the levy is insufficient.
The IMF said the FSC should be "refined over time to reflect explicitly (systemic) risk" posted by banks. It added: "The FSC would ensure that the industry helps meet the costs of any potential resolution and would reduce systemic risk.
"If designed properly, resolution mechanisms will avoid governments in the future being forced to bail out institutions deemed too important, too big, or too interconnected to fail." The IMF said that any further contribution from the financial sector should be raised by a "Financial Activities Tax" (FAT) levied on the sum of the profits and remuneration of financial institutions, and paid to general government revenues.
"Depending on its design, the FAT would ensure that the financial sector contributes to the wider fiscal costs associated with financial crises, addresses some equity concerns, and/or helps offset tax distortions that may result in the financial sector being too large," it said. The fund also said international cooperation would be needed to make the new levies successful, given the importance and complexity of cross-border financial institutions.
"The experiences of countries in the recent crisis differ widely and so do their priorities as they emerge from it. But no country is immune from the risk of future – and inevitably global – financial crisis," it warned.
"Unilateral actions risk being undermined by tax and regulatory arbitrage, and may also jeopardise national industries' competitiveness. Coordinated action would promote a level playing field for cross-border institutions and ease implementation."