U.S. Treasury Secretary Timothy F. Geithner said a proposed bank tax would target big financial companies that use short-term funding to finance risky practices such as derivatives and off-balance sheet trading.
“We designed the fee so that it would fall most heavily on firms that fund riskier activities with less stable forms of funding,” Geithner said today in prepared testimony to the Senate Finance Committee.
The Obama administration has asked Congress to enact what Geithner described as a “too big to fail tax” on financial firms with more than $50 billion in assets to recoup the costs of the Troubled Asset Relief Program. The fee would raise $90 billion over 10 years and would stay in place until the government recovers all the costs of the bank rescue, Geithner said.
The levy would be based on a formula to measure assets, liabilities and risk. Firms engaging in riskier trading would pay more than “more conservatively” managed firms, and 99 percent of U.S. banks would be excluded from the fee, he said.
Senator Orrin Hatch, a Utah Republican, questioned whether the fee would discourage large banks from expanding or adding services in order to minimize payments to the government. Hatch’s state is home to Zions Bancorporation, which has $51.7 billion in assets and is this year’s best-performing stock in the Standard & Poor’s 500 Index, up 126 percent through yesterday’s close.
Geithner responded that the fee could be set up in a way that doesn’t hurt consumer-oriented banking.
“For banks that take deposits to fund loans to their business customers, they would not be bearing any material fee as part of the way we designed this,” he said.
The Obama administration proposed the tax sooner than the law required to send a signal that the U.S. is trying to restore its budget deficit to “sustainable” levels, Geithner said. The administration has projected a $1.6 trillion budget deficit in fiscal year 2010, which began Oct. 1.
“Delay is neither necessary nor desirable at a time when people are worried about our political capacity as a country to help dig our way out of the fiscal damage caused by this crisis,” Geithner said.
Financial industry representatives told the panel that the proposal doesn’t live up to the government’s legal requirement to recoup TARP costs or consider the economic impact of more financial regulation.
“We question why the financial industry should be asked to pay for TARP losses attributable to other industries,” Steve Bartlett, president of the Financial Services Roundtable, said in prepared testimony.
Geithner said banks and other financial firms benefitted from the stability that TARP and other rescue efforts provided and therefore should bear the burden of repaying the government. He said the Obama administration opted not to subject auto companies General Motors Co. and Chrysler Group LLC to the tax because of the restructuring the automakers went through as a condition of receiving aid.
“Since they went through bankruptcy and restructuring, we didn’t think it was necessarily appropriate for them to bear, to be covered by a fee, that as you’ve seen is designed to help us make sure that we’re reducing risk in the financial system,” Geithner said.
Geithner said the government will work “very hard” to recover the assistance to the auto companies. He also said Federal Reserve efforts to support the banking industry through the crisis have the potential to return “tens of billions of dollars” in profits.
The U.S. has endorsed an effort by the Group of 20 nations to have banks shoulder financial rescue costs after governments and central banks provided an estimated $11 trillion to institutions including Citigroup Inc., Royal Bank of Scotland Plc and American International Group Inc.
In meetings last month, Geithner sought to bridge the gap between European proposals to tap banks for revenue and Canadian opposition to a fee on banks that didn’t need help during the crisis.
In today’s testimony, Geithner said the U.S. would continue its efforts to forge an international consensus.
“We want to design the fee in a way that improves the chances that other governments will adopt similar measures,” Geithner said. He said the Obama administration also would work with Congress to find the best approach for the U.S. financial system.