IMF still prefers its two ideas for global bank tax

MILAN Mon May 17, 2010 2:00pm BST

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MILAN (Reuters) - The IMF still favours either a form of international deposit insurance levy or a tax on financial institutions' profits and remuneration as ways of preventing a repeat of the financial crisis, a senior official said on Monday.

Amid intense public anger at banks in many developed countries, the multilateral lender has been asked to prepare proposals for a summit of G20 leaders next month in Canada on how to make banks pay for a bailout that cost hundreds of billions of dollars.

But when the IMF's put its initial proposals for the two levies before a G20 meeting in April they proved controversial.

While countries that had experienced severe problems, such as Britain, were committed to taking action, others such as Canada, whose banks passed through the 2007-2008 financial crisis without government assistance, oppose a blanket tax.

To allay concerns that a global bank tax might punish banks that performed well during the global crisis, the G20 told the IMF to consider "individual countries' circumstances.

The IMF has said the deposit insurance option, dubbed a "financial stability contribution," could be a simple levy on a selected set of balance sheet variables, but could be fine-tuned to weigh more heavily on firms that pose larger systemic risk.

Carlo Cottarelli, director of the International Monetary Fund's fiscal affairs department, told reporters the Fund did not like the idea of a financial transaction tax or "Tobin Tax," which is widely believed to be distortive and easily avoided.

He said the IMF still broadly favoured the two methods presented in April: a levy "similar to deposit insurance to insure the liabilities that are not covered at the moment," and a financial activity tax, "which would be a tax on profits and remuneration in the financial sector."

Some economists have questioned whether broadening deposit insurance could lead to increased "moral hazard" in the banking system by encouraging investors to ignore default risk.

The bank levy is part of a regulatory response aimed at addressing the circumstances that led to the global crisis, including stricter regulation of derivatives, hedge funds and ratings agencies, closer attention to bank capital ratios and liquidity and renewed discussion of global financial imbalances.

(Writing by Daniel Flynn; Editing by Kevin Liffey)

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