Bailout

The too-big-to-fail tax

By Felix Salmon

Barry Ritholtz knows what he’d like to see in terms of a new bank tax, and I like the way he’s thinking:

Exempt small regional banks with under $25 billion in deposits. Make the tax progressive so it become increasingly larger as deposits become greater. $25-$50 billion in deposits is one fee (Let?s say 0.1%, that?s $25 million on $25 billion in assets). Have it scale to the point where its punitive ? 1% on a trillion dollars in deposits.

The goal here isn?t to raise money ? its to force the TBTF banks to become smaller ? to break up the Citigroups and the Bank of Americas. This tax will restore competition to the banking industry.

I think that total liabilities are a better number to use than total deposits: we want this tax to apply to Goldman Sachs as well as Wells Fargo.

Barry’s plan might not be far from what the Obama administration wants to do — although I doubt that the fee will approach a full 1% of liabilities, no matter how big a bank gets. Shahien Nasiripour has talked to “a senior administration official”, who says that the tax is designed to claw back from too-big-to-fail banks the windfall they’re getting from their TBTF status. (Dean Baker calculates that windfall as being $34 billion a year.)

The banking industry, when this tax is announced on Thursday, will certainly start making noises about how the extra costs are going to be passed on to customers. And I daresay they’re right: if you bank with a TBTF bank, you might well see your costs rise. So move your money to somewhere smaller!

Full post as published by Macroprudential on January 13, 2010 (boomark / email).