The report reveals that a “financial stability contribution” would work best if it were levied on bank balance sheets, specifically their liabilities. The IMF suggested each country would want to raise between 2 per cent to 4 per cent of its gross domestic product over the long term.
After analyzing various options, the IMF interim report proposes two forms of contribution from the financial sector, serving distinct purposes:
1. A “Financial Stability Contribution” (FSC) linked to a credible and effective resolution mechanism. The main component of the FSC would be a levy to pay forthe fiscal cost of any future government support to the sector. This component couldeither accumulate in a fund to facilitate the resolution of weak institutions or be paidinto general revenue. The FSC would be paid by all financial institutions, with thelevy rate initially flat, but refined over time to reflect institutions’ riskiness andcontributions to systemic risk—such as those related to size, interconnectedness andsubstitutability—and variations in overall risk over time.
2. Any further contribution from the financial sector that is desired should be raised by a “Financial Activities Tax” (FAT) levied on the sum of the profits andremuneration of financial institutions, and paid to general revenue.
International cooperation would be beneficial, particularly in the context of crossborder financial institutions.Countries’ experiences in the recent crisis differ widely and sodo their priorities as they emerge from it. But none is immune from the risk of a future—andinevitably global—financial crisis. Unilateral actions by governments risk being underminedby tax and regulatory arbitrage. Effective cooperation does not require full uniformity, butbroad agreement on the principles, including the bases and minimum rates of the FSC andFAT. Cooperative actions would promote a level playing field, especially for closelyintegrated markets, and greatly facilitate the resolution of cross-border institutions whenneeded.
Actions are also needed to reduce current tax distortions that run counter to regulatory and stability objectives.The pervasive tax bias in favor of debt finance (through thedeductibility of interest but not the return to equity under most tax regimes) could beaddressed by a range of reforms, as some countries already have done. Aggressive taxplanning in the financial sector could be addressed more firmly.
More analysis will be undertaken to assess and refine these initial proposals. The final set of proposed measures, including more details on key design elements, will be delivered to the G-20 leaders for their June 2010 summit. This work will be guided by the discussions at the April 2010 ministerial meeting, further consultations as well as the joint IMF/FSB/BCBS work on the cumulative quantitative impact of regulation and tax burdens on the financial sector.
The Financial times reports that Alistair Darling welcomed these initiatives y saying: “The recognition that banks should make a contribution to the society in which they operate is right. Any agreement has to be international and that unilateral attempts would simply risk being undermined.”
© International Monetary Fund
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