Sunday, April 04, 2010

Germany's New Stability Levy Proposal

NY Times: Germany Readies Bank Tax for Future Bailouts
CCTV: Germany Approves Plan for Bank Stability Fund
BBC News: German Banks to Pay into Financial Protection Fund
WSJ: Germany, France Both Plan Bank Tax

German Finance Minister Wolfgang Schaeuble has announced a plan that would require all German banks to pay a “stability levy” into a financial stability fund intended to serve as a bailout fund for future systemic failures in the German banking system. The proposed levies will be weighted according to each bank’s risk profile. Schaeuble and the rest of the German government predict the levy will generate approximately 1.2 billion Euros each year. While this amount is just a small percentage of the bad loans German banks presently carry as a result of the recent financial crisis, the Finance Minister expects the fund to grow large enough over time to adequately cover the costs of a future financial crisis. The German government expects to draft and pass legislation on this levy as soon as this summer.

French Finance Minister Christine Legarde, who was visiting Germany for a cabinet meeting in Berlin when the levy was proposed, has said France is also considering a similar levy, but that it must be coordinated internationally. The UK’s conservative party has also suggested that it will adopt a similar levy if it wins the upcoming election. Last year the UK imposed additional taxes on bonuses in the financial sector, but stopped short of mandating a levy of this magnitude. President Obama, in his efforts to alleviate taxpayer concerns over the U.S. Government’s bank bailout program, also recommended a “financial crisis responsibility fee” that would require the biggest banks in the United States to pay fees in an effort to recoup the cost of the bailouts.

Germany’s stability levy proposal comes at the same time that the G20 and the IMF have been developing their own plan for a G20-wide bank tax. British Chancellor of the Exchequer Alistair Darling has suggested that any levy imposed on G20 banks should go into their respective countries’ budgets, not a global bailout fund.

Supporters of the German levy say that it will generate ample funds to mitigate any future bailout risk, while not placing an overly burdensome obligation on the banks’ ability to recover from the current crisis. They say it achieves the purpose of placing the responsibility of preventing future systemic risks on big banks. Opponents, on the other hand, say that the proposed levy will not yield enough money to prevent future crises, and is just a political move ahead of an upcoming election season.

Discussion Questions:
1. Does the no-bailout provision of the EU’s treaty prohibit a collaborative stability levy creating an EU-wide bailout fund?
2. Would Darling's country-specific tax proposal circumvent the prohibition?

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