World Business

IMF to keep mulling how to make banks pay for bailouts

(Agencies)
Updated: 2010-04-26 16:31

WASHINGTON: The International Monetary Fund pledged on Sunday to keep working on plans to make bankers bear the burden of their own bad behavior and not to lose heart over opposition to their first ideas for a global bank tax.

In a blog posted days after Group of 20 finance ministers publicly split over taxing their banks -- with some like Canada saying they hadn't needed bailouts and shouldn't be penalized by new taxes -- the IMF protested mildly that it was only a first run at a proposal.

The Fund said it will look at more ideas but made clear it was still looking for ways to make future financial crises less likely and easier to clean up when they do happen.

"Our aim is to take a cool look at the issues about which everyone gets so heated," said Carlo Cottarelli, head of the IMF's fiscal affairs department, in a brightly written commentary that put the issue in plainspoken terms.

Public anger at banks is intense in countries like the United States, where taxpayers were put on the hook for hundreds of billions of dollars in bailouts. The IMF was asked to prepare proposals for Group of 20 political leaders to consider when they meet in Canada in June.

The frosty reception given by some finance chiefs, notably Canadian Finance Minister Jim Flaherty, wasn't promising. But the IMF said the problem remains and needs to be addressed.

"The challenge is to ensure that financial institutions bear the direct fiscal costs that any future failures or crises will impose -- and maybe somewhat more, given all the other costs that bank failure can impose on the economy," Cottarelli said.

One of the problems when the crisis hit was that countries lacked the legal authority to wind down, or resolve, failing institutions and real financial stability won't be achieved until such mechanisms are in place, the fund said.

But even then, the IMF noted that it takes money to wind up a firm and that was why it suggested a "financial stability contribution" that it likened to the deposit insurance that protects depositors from losing their savings if a bank fails.

It could be a simple levy on a selected set of balance sheet variables, or off-balance sheet measures, but could be fine-tuned to weigh more heavily on firms that pose larger systemic risk.

The IMF also looked at a financial transactions tax, one which would be paid every time a share, bond or other financial instrument was bought or sold or when currencies were bought or sold but felt it was less workable.

The differences over a fee, or financial stability contribution, may not be as serious as they seemed at the G20 meeting, the IMF suggested since it could be tailored to reflect the degree of risk in a country's financial system,

"If the FSC (financial stability contribution) in particular is properly risk-adjusted, countries with safer systems will simply face a smaller contribution," Cottarelli said, adding that some preparation for future downturns is necessary and that no country can count itself immune from risk.