Bankers battle big-bank bashing in Davos (1)

Despite the wide-ranging program’s inclusion of such non-economic discussion topics as “What Every Person Should Know about Prostate Cancer” and “The Power of Music,” the WEF 2010 meeting was dominated by the public and behind closed-door discussions on economic issues, especially the current Greek sovereign debt crisis and the controversial regulation of the financial sector. I will focus here on the regulation of the financial sector, in particular the big banks, which was the shared major topic of several WEF 2010 panels such as “Rethinking Systemic Financial Risk.” In two earlier columns (The Obama Financial Regulatory Plan (1) and (2) on June 22 and 23, 2009), I discussed the Obama administration’s controversial blueprint, “Financial Regulatory Reform: A New Foundation.” Although the US Congress, diverted by a bitter fight on major health-care reform, which now looks like a lost cause, has been trying to draft legislation, based partly on that blueprint, it has not lived up to the Obama administration’s expectations of finishing the task by the end of last year. Although the House has passed financial reform legislation, incorporating some of Obama’s blueprint, the Senate has not yet. Since revealing its yet to be legislated reform plan in June, the Obama administration has taken two steps this month toward financial sector regulation. Both steps, which go beyond the Basel Committee’s stronger bank capital requirements and liquidity standards, have been widely criticized from opposite directions as either too draconian or too lenient and with several potentially harmful unintended consequences. Several big bank chiefs, including Robert Diamond, the president of Barclays, spoke against them publicly at Davos. They also face an uncertain future in the US Congress, especially in the aftermath of Barack Obama’s loss this month of his party’s filibuster-proof majority in the Senate.

As a first step, Mr. Obama, who has adopted an increasingly populist stance against banks and bankers, proposed two weeks ago to tax banks to reduce their risk-taking, recoup taxpayer funds from the recent costly and unpopular bailouts and finance the cost of future bailouts. The proposal, named a “Financial Crisis Responsibility Fee,” was expected to raise $90 billion over the next 10 years, with 60 percent of the revenue coming from the 10 largest banks. The tax, 0.15 percent of bank liabilities (minus insured deposits), would force banks to raise more equity capital but also discourage lending. It would apply to US subsidiaries of 10 to 15 foreign, mostly European, banks. This balance sheet-based tax proposal contrasted with the alternative proposal, favored by most European countries, to impose a global financial transactions (Tobin) tax, not favored by the US, primarily for discouraging what are deemed to be excessive speculation in interbank markets. The International Monetary Fund (IMF), mandated by the G-20 to study how such a tax can be constructed and implemented, is expected to report its findings in April before the June G-20 summit in Toronto. Such a tax would be a variant of a global levy on banks for a resolution fund, as an insurance scheme, to resolve bank failures without taxpayer-funded bailouts, now willy-nilly accepted by an increasing number of large banks. They realize that it is now payback time for them in one way or another.