Over the weekend, David Cameron, leader of the Conservative opposition in the UK, unveiled the latest plank of his election campaign — a levy on banks.
“So I can announce today that a Conservative government will introduce a new bank levy to pay back tax payers for the support they gave and to protect them in the future,” he said in a speech on Saturday. “No, it won’t be popular in every part of the City. But I believe it’s fair and it’s necessary.”
The aim of the speech was to paint the Conservative Party as willing and able to take on “vested interests”, and labelled banks as “some of the biggest vested interests in our country”. Clearly Cameron believes there is political mileage, just before a general election, to be had in taking on the banking sector, despite the party’s central goals of lower tax and less regulation in business.
Whether or not he and his party have fully understood the implications of such a tax remains to be seen. By creating a resolution fund, the Conservatives might actually be encouraging banks to take more risks — the theory being that if banks know they are insured against making catastrophic decisions they might feel freer to make them. Therefore, the funding structure and the conditions attached to the bailout fund’s use need to be carefully thought through to minimise moral hazard and re-encourage market discipline.
Harmonisation out the window
In order to distinguish his party’s position from Labour, Cameron said that the tax would be levied regardless of the international picture — the Labour government argues a permanent tax (beyond the one-off bonus tax) would only make competitive sense if applied globally. The Tory plan would be for a unilateral tax to be imposed at a lower level if there is no international consensus.
In reality, though, the only other country that really matters in this context is the USA, where president Barack Obama has proposed a tax on bank balance sheets, ostensibly to pay back taxpayer support under the Troubled Asset Relief Programme. And while there may be some migration at the margins, the Anglo-Saxon banking world is not about to up sticks and move to Switzerland, let alone Paris or Frankfurt, if these levies are imposed.
With the slow pace of international dialogue on financial reform, and the even slower pace and uneven direction of transforming internationally agreed upon principles into concrete action, more and more unilateral steps will be taken in the months ahead, especially in countries with looming elections.
Harmonisation is a noble goal and may be achieved in some fields, at least on a regional or trans-Atlantic basis. But the firm conviction shown by policymakers at the peak of crisis that reform of financial regulation and crisis management needed to be and could be strongly harmonised is rapidly fading as domestic political expediency takes over.