WASHINGTON — As lawmakers continue to spar over regulatory reform legislation, a separate push to charge the largest banks a "financial crisis responsibility fee" is gaining momentum.
The administration's January proposal to charge banking companies a fee of 15 basis points on their liabilities — meant to cover Troubled Asset Relief Program losses — lost steam earlier this year when it appeared Tarp may turn a profit.
But it has gained considerable ground in recent weeks. The Senate Finance Committee is to address the issue at a hearing today, and Rep. Sander Levin, D-Mich., the chairman of the House Ways and Means Committee, broadly endorsed such a fee Monday.
Many observers said the fee will be tough to stop.
"If the GOP opposes the tax, it looks like they're standing up for Wall Street, which is super-unpopular now," said Robert Litan, a senior fellow at the Brookings Institution and the research chief at the Kauffman Foundation.
Part of the fee's resurgence in popularity is tied to the receding chances for enactment of a provision in the regulatory reform bill that would force banks to pay up front into a resolution fund for systemically important banks. Republican leaders have argued that the provision would lead to more bailouts, and Senate Democrats signaled Monday they were backing away from it. (See related story.)
Lawmakers may have become wary of putting too many extra fees on large institutions, but if the resolution fee is nixed, the so-called bank tax becomes more likely, many observers said.
"I don't know exactly how to handicap the chances" for a bank fee "right now, but they're certainly more likely than a week ago," said Brian Gardner, an analyst at KBW Inc. "This is a zero-sum game. As a prefunded resolution fund fades, the bank tax picks up steam," he said. "Not to mention … all the chatter over the weekend about" fraud allegations against Goldman Sachs Group Inc. "adding momentum to the Dodd bill. I think it probably adds as much if not more to the bank tax."
The Senate Finance Committee is to tackle the issue today, a few days after the Joint Committee on Taxation released a report analyzing bank-tax options. The Group of 20 is also expected to discuss a possible global bank tax this week as the International Monetary Fund releases a report on its feasibility.
So far, it remains unclear exactly how a domestic fee might be levied. The White House proposal was broad, saying only that companies with more than $50 billion of assets should be charged based on their "worldwide consolidated liabilities."
But the Joint Committee on Taxation report outlined several alternatives, including a fee based on a company's income, one charged on a large institution's "excess profits," an assessment tied to a company's level of risk and a fee linked to how much Tarp money a company took.
"Some have argued that a tax measured as a fixed percentage of assets or liabilities may actually encourage institutions to undertake riskier investments in pursuit of higher returns to offset the cost of the tax," the report said.
Levin said it is too soon to tell exactly what type of tax scheme would win consensus but reiterated that it remains a priority.
"One way or another we are going to consider this issue as to a financial fee or tax on the institutions that benefited from the essential rescue of our economy," he said in remarks at the National Press Club. Afterward, he added: "We are really just beginning our discussions now."
It appears unlikely, at least for now, that a fee will be included in the broader regulatory reform effort. Senate Banking Committee Chairman Chris Dodd said Monday that he does not oppose the idea but is not planning on including it.
Some observers said that, as time goes by, a narrow fee initially imposed just on Tarp recipients could be broadened to more banks and for more purposes.
"You could see this morph even more," said Jaret Seiberg, an analyst at Washington Research Group, a division of Concept Capital.
Gardner said the initial tax could be like the "camel's nose under the tent."
"The idea behind the bank tax was that it was to make the government whole for losses that it suffered on Tarp. That is a one-time levy, supposedly," he said. "Once you open that door, the question is: Would the government feel emboldened to come back to banks and use that form again for other issues? We're going into heavy budget battles down the road. Do the banks start to be looked at as cash cows?"
Also unclear was how the special revenue from financial companies would be used.
Seiberg said directing the funds to new activities such as resolving failed companies could be off-limits. "The tax revenue is going to be … as offsets for new spending programs," he said.
But others would not rule out using the tax to help resolve collapsed companies.
"You can still accomplish the same thing" as a resolution fund "with a tax," said Kevin Jacques, a finance professor at Baldwin-Wallace College. "You can still put particular costs on particular institutions that you deem systemically important, but now you've used the word 'tax.' Politically, that would work very well with the American public."