Obama's smart bank tax

by Ed Bowsher on 14 January 2010  |  0 comments
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Barack Obama's planned bank tax is very smart. It will encourage banks to stick to their knitting and might even boost rates on savings accounts.

"We want our money back, and we're going to get it."  

With those words, Barack Obama made it very clear he's determined not to be pushed around by the over-bonused bankers of Wall Street. 

Even better, he's come up with a very clever way of siphoning off some of the banks' post-crunch profits. The planned tax will hit banks' liabilities - in other words, their sources of funding. But it won't hit all liabilities - deposits made by ordinary savers will be exempt. 

So the tax will effectively hit the 'hot money' that banks raise from other banks and investors in the wholesale markets. One of the major causes of the financial crash was that some banks had become overly reliant on short-term funding and had lost interest in raising money the sensible way from ordinary savers. 

The advantage of wholesale markets is that they're normally cheaper and simpler than other routes. The disadvantage is that they're riskier. If wholesale markets seize up, you've got a crisis on your hands. This is exactly what happened to Northern Rock. 

Banks were able to raise cash more cheaply from wholesale markets but this was a much more risky approach. Northern Rock went bust as a result. Obama's tax will make it more expensive to raise cash from the wholesale markets and banks will have an incentive to focus more on traditional savings accounts as a result. Rates on US savings accounts may rise. Great! 

Does it make any difference to the UK? 

Well, some UK banks have significant operations in the US so they will have to cough up for the tax. 

But, more importantly, I wouldn't be surprised if European governments followed Obama's lead on this sooner or later. Then UK-based banks would need to raise more cash from ordinary folk which would inevitably mean one thing - higher rates on savings accounts. 

That said, I shouldn't get carried away. Far too many US politicians have accepted big campaign donations from Wall Street so there's a good chance that Congress will kill this plan. And if the US doesn't introduce this tax, I fear the next UK government won't want to do anything here due to concerns about hobbling UK banks in the global market place. 

So who knows what will happen in the end? But three cheers to Obama for coming up with a good idea.