Of course Deutsche Bank’s Josef Ackermann and
Barclays Capital’s Bob Diamond are thrilled at the
idea of a global levy on banking to finance a rescue fund to
bail out failing institutions.
What could be more painless than a modest tax on a whole
industry, whose customers have nowhere else to go?
Since a global levy would apply to all players, it would not
hurt any bank’s competitive position. If it made
shareholders less willing to hold bank equity, the cost could
simply be passed on to customers. Phew! That was easy.
Naturally, the tax idea is as fanciful as it is pernicious.
Here are just two of the reasons.
Can you realistically imagine an international pot of money,
swelling year by year, being allowed to just sit there? In the
interim, it would have to be invested – no doubt in
government bonds (imagine the rows over whose bonds). But as
time went on and the fund was not called on, think of the cries
that it was inefficient and wasteful to maintain this
Eventually public opinion would crack, and some of the money
would be released. Then, perhaps a decade later, the next Big
One would finally come along. Remember it took 79 years from
1929 to 2008. Then the world would find the pot woefully
inadequate to the rescue job required – as it would
almost certainly be, even without money leaking out.
But that only means the levy would probably be useless. It
would also certainly be dangerous.
By promoting the idea that banks (really, their customers)
were paying up front for the bailouts of the future, it would
enshrine moral hazard in the financial architecture.
"Yes, banks are going to fail," this policy says, "but
it’s alright, you the public can start paying for
it now. Then when the time comes it won’t hurt
nearly as much."
Meanwhile everyone can blithely lend to shoddy institutions,
confident that a big fund would rescue them if all goes
There is much to be said for insuring retail deposits, up to
a limit. This short term capital is supplied by the most
vulnerable and least informed investors.
But there it must end. Bond and equity investors –
and derivative counterparties – have got to feel the
sharp end of risk, or they cannot exercise the necessary
discipline over cavalier banks.
A global policy that would really help is an international
commitment never to guarantee the wholesale debts of any
private sector bank. That would mean the only route to a state
guarantee was state ownership. You’d soon find
shareholders asking tougher questions about the risks banks
Depressingly, the policy that’s being discussed
in Davos is the opposite – lots and lots of
What really scares the bank CEOs is Paul Volcker. A man with
a genuine plan, albeit a modest one, that just might make bank
bailouts less necessary.
Is it a coincidence that so soon after President Obama
adopted Volcker’s idea to ban deposit-taking banks
from proprietary trading, the top bankers suddenly came out in
favour of another big idea?
Proprietary trading is a noble activity that we have no
here’s a challenge. Explain in less than a page
what social or economic benefit is served by housing it in the
same institutions as retail deposit-taking.
Jon Hay firstname.lastname@example.org