Bank Tax

Global Consensus Key to Introducing New Levies

All players now realize that an ounce of prevention is worth a pound of cure when it comes to the unprecedented global and financial crisis. In this regard, policymakers of major countries are jockeying for an international framework to avoid a recurrence of the meltdown. Such efforts include a proposal for a global bank tax designed to prevent and manage potential crises in the future.

It is worth noting that the International Monetary Fund (IMF) has proposed two new global taxes on banks and other financial institutions to raise financial resources to cover the cost of future bailouts. Certainly, the recommendation will provide momentum for global discussions on whether to put the idea of this taxation into action. This issue is also expected to be on the top of the agenda during a G-20 meeting of finance ministers and central bankers to be held this weekend in Washington.

In January, President Barack Obama disclosed a plan to collect such a bank tax to recoup $700 billion of bailout funds injected into banks. And Britain, France and Germany have broadly agreed on the need for the levy.

However, it is hard to paint too rosy a picture. Canada immediately turned down the proposed bank tax, saying that it could result in excessive risk taking and weaken banks' ability to absorb losses.

Many developing countries are also against the levy due to its adverse impact on their banking industry. What's important is to build a global consensus on this contentious matter. Needless to say, no matter how well-intended, the tax can and will not be implemented without any agreement among the world's two major economies.

It is necessary for South Korea to have close policy coordination with advanced and developing states in order to help them reach common ground. Minister of Strategy and Finance Yoon Jeung-hyun is positively reviewing the bank tax. His ministry has already set up a taskforce to study how, when and whom to levy. This means that the country has felt the need for the introduction of the tax despite some concerns about it.

The IMF tax formula breaks down to a general levy on lenders, called the ``financial stability contribution (FSC),'' and a further tax on profits and pay. The agency said the FSC rate could range between 2 and 4 percent of gross domestic product (GDP). Korean policymakers seem to believe that the FSC will help local banks reduce their high-risk assets, especially their excessive exposure to short-term foreign debt. And it is also likely to help block the sudden influx or outflow of global hot money.

However, they should pay heed to worries that banks might pass the tax on to consumers. After the 1997-98 Asian crisis, local banks went cap in hand to the government for huge bailout funds pinched from taxpayers. The authorities must ensure that consumers do not shoulder any burden for the envisaged levy. Equally important is to prevent the tax from drastically reducing banks' profits and hurting their competitiveness.