England and America, as George Bernard Shaw said, are two
countries separated by a common language. But when it comes to banking
regulation, these countries, host to the world’s two largest financial centres,
appear to be speaking in different dialects.
Where this dissonance risks turning into more than a war of words is over
plans to recoup the billions of taxpayers’ money used to bail out the banks and
to provide a fund to compensate governments for future banking collapses.
In one corner are Gordon Brown and Alistair Darling, the Chancellor, who are
keen to re-animate the once dormant idea of imposing a global tax on currency
transactions and extending this to all financial contracts a financial
transactions tax (FTT) better known as the Tobin Tax, named after its inventor,
the late Nobel Laureate James Tobin, who, in 1972 proposed curbing speculative
transactions by using a tax to put “sand in the machine”. He has proven to be
something of a Cassandra.
In the other is Barack Obama who wants to impose a levy on the largest banks
in the US to raise around $90bn in the next decade, to meet the costs of his
government’s bailouts. Who would handle this money and what exactly would be
done with it not least, in-between inception and the next banking collapse,
when it is intended to be used as compensation for governments remains to be
The methods may be different, but the aim is the same to meet popular demands
that banks pay for the costs that financial failures incur. But will popular
demand wither as economies return to growth, and if it does, will these ideas be
In the UK, we’ve even seen a celebrity-backed campaign calling for the Tobin
Tax, while in mid-February Peter Hain became the first Cabinet minister to
publicly back the concept. Citing comments in Progress magazine, The Guardian
reported Hain saying: “On the one hand, there is global warming, global poverty
and the prospect of massive, right-wing driven cuts to public services,
resulting in a double-dip recession. On its own, maintaining public spending
isn’t the answer to all these problems. But part of the alternative is the
application of innovative financing arrangements such as a financial
transactions tax. And this is what the Robin Hood Tax represents.”
However, back in January one learned voice, former International Monetary
Fund (IMF) chief economist Simon Johnson told BBC Radio that he believed the
Tobin Tax “still doesn’t address the core problem which is really about
financial institutions that are ‘too big to fail’. Financial transaction tax is
more of a tax on regular people like you and me.” Johnson believes a better
solution is simply to curb banks becoming too big to fail with appropriate
legislation in other words, a return to something akin to the Glass-Steagall
Act. That puts into sharp focus the fact that the problems that precipitated the
Act back in 1933 seem to have been repeated even after decades of regulatory
At the moment, there appears to be movement on these levy ideas. “There is
growing momentum behind proposals for some sort of global levy on the banks,”
says Julian Jessop, chief international economist at Capital Economics.
G20Gordon Brown breathed life into the idea last November when he raised it
as one of four options to curb bankers’ excesses at the meeting of G20 finance
ministers in St Andrews. Somewhat predictably, the idea won strong support from
German Chancellor Angela Merkel but ran into stiff opposition from the US. As
Stephen Lewis, chief economist at Monument Securities, notes, “The puzzle is why
Gordon Brown advanced a plan for a tax which he must have known would not find
favour with the US team.”
But there are signs it is building support, according to Jessop. “Momentum
seems to be increasing even in the US,” he says.
According to him, the advantage of the FTT is that it would change behaviour
as well as bring in revenue to insure against future failures. “It could kill
two birds with one stone,” he says. “I think that some sort of Tobin Tax on
high-frequency transactions would be a good idea.”
A 2007 report for an all-party committee of MPs, produced by campaign group
Stamp Out Poverty, estimated that a 0.005% tax imposed solely on sterling
currency transactions would raise $5bn a year, which it wanted to be used for
poverty relief. In the US, the Economic Policy Institute says that a 0.5% levy
imposed on a much wider range of assets could raise as much $226bn a year.
Jessop acknowledges the criticisms that the FTT would be difficult to collect
and police, but says they are overdone. “If there is a will and if the US signs
up, it will happen,” he says. At the recent World Economic Forum meetings in
Davos, however, support seemed to shift towards using the Obama proposal as the
basis for a permanent and global levy on major banks.
The banks have complained, but after a while probably seeing the
impact-minimising value in getting on board early many seem ready to sign up
to a “resolution fund” that could help pay for future rescues. Speaking in
Davos, Josef Ackermann, chief executive of Deutsche Bank, advocated a European
rescue and resolution fund, adding, “Of course, the capital for this fund would
have to come from banks to a large degree.”
Jessop believes the banks may be favouring the levy because, behind closed
doors, it would do “nothing to curb excessive risk taking and might even
At the Pittsburgh Summit, the leaders of the G20 instructed the International
Monetary Fund to examine the feasibility of both the resolution fund and the FTT
and to report back at the IMF’s meetings in April.
Stephen Lewis, chief economist at Monument Securities, says part of the
problem lies with the G20’s inability to deliver a consensus on the path for
regulatory reform. Indeed, there is another transatlantic divide this time
over how to prevent banks from returning to ‘business as usual’ and embarking on
risky, speculative dealings.
President Obama has proposed preventing banks becoming too big to fail (which
even has its own acronym TBTF) by banning them from proprietary trading,
speculating with their own money and owning hedge or private equity funds. That
is a sweeping change.
The UK, on the other hand, has consistently rejected the TBTF thesis,
preferring to focus on raising banks’ capital requirements, reducing their
leverage and tightening regulation.
“Since Pittsburgh, the coordinated global approach to regulatory reform has
broken down,” says Lewis, warning that the issue could drag on to the next G20
Summits in Toronto in June and Seoul in November.
The problem, he says, is that there is no consensus among the G20 about what
should be done on bank taxation.
“Against that policy background, it seems the banks will be operating in an
uncertain tax environment for a while to come,” he says.
Uncertainty over the next stage of financial regulation will keep banks
reluctant to increase lending to customers, which in turn could derail the
economic recovery. Given the state of the political opinion polls on both sides
of the Atlantic, that would be bad news for Brown and Obama in any language.