What is a Bank Tax?

Jessica Ellis
Jessica Ellis

A bank tax, known formally as a financial stability contribution (FSC), is a levy on financial institutions meant to repay debts and provide insurance for possible future problems. The tax money would be taken from a portion of a financial institution's revenue, based off of the current year's balance sheet. The idea of a bank tax was suggested as a response to the global financial crisis beginning in 2007, as a means of repaying bailout money given by governments to banks, and creating an insurance policy against future bailouts. Critics of a bank tax suggest that banks will respond by cutting lending and charging more fees to customers. Supporters argue that by cutting the enormous bonuses regularly handed out to bank executives, and imposing a tax on financial institutions, fees to pay the tax won't need to be passed on to citizens.

Man climbing a rope
Man climbing a rope

Development

One of the results of the financial crisis of 2007 includes the concept of “too big to fail” companies. These were judged to be lending institutions with such enormous scope that having the government bail them out would be less expensive than allowing them to fold in the wake of their own mistakes. Few people in any government were pleased about the situation, and many taxpayers were angered that their own financial troubles were ignored, while those of the enormously wealthy banking industry were saved by the government.

One of the major responses to this conundrum was the creation of the bank tax proposal, one of three options offered by the International Monetary Fund (IMF) at the G20 summit in 2009. At a request from nation leaders, the IMF proposed a series of measures that could be adopted on a national or global basis, that would help prevent taxpayer money from being compromised in the wake of another financial crisis. In addition to a tax on financial institutions, the other two options include the financial activities tax (FAT) and the financial transaction tax (FTT).

This suggestion was followed up by US President Obama's Financial Crisis Responsibility Fee in 2010, which urged the US Congress to enact a bank tax that would start as a flat-fee payment for all included financial institutions, but gradually shift to reward those that take lower financial risks with lower payments. The Financial Crisis Responsibility Fee excluded all banks with assets under $50 billion US Dollars (USD), thus protecting smaller groups from increased liability. As of 2010, no bank tax has been enacted, though several European countries, such as Germany and France, have seriously considered imposing the tax.

Controversy

Some world leaders disapproved of the IMF suggestion to impose a global bank tax, particularly in nations that suffered little financial fallout during the crisis. Both Canada and Australia argued that their banks were fiscally responsible, and should not be penalized for the faults of other banking systems in other nations. At the G20 summit in 2010, it was decided that a global tax was no longer available, but rather each country could decide whether or not to enact a tax on banks. In response, the IMF and supporters suggested that the bank tax is meant to provide for future crises, and that no nation should consider itself immune from future fiscal disaster. Many governments are still in the process of deciding which route to take to protect against future financial problems.

Jessica Ellis
Jessica Ellis

With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica is passionate about drama and film. She has many other interests, and enjoys learning and writing about a wide range of topics in her role as a wiseGEEK writer.

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