Geithner clarifies bank tax structure at Finance Committee hearing

Treasury Secretary Timothy Geithner said May 4 that the Obama administration's proposed fee on financial institutions is a "fair and sensible" approach to recouping funds doled out through the Troubled Asset Relief Program (TARP), and would serve as a deterrent for risky behavior on the part of those banks. Appearing before the Senate Finance Committee, Geithner provided insight into the proposed tax, and confirmed that under the proposal as drafted the fee would be assessed on financial institutions that have least $50 billion in assets and were eligible for TARP assistance. The fee would not be limited to direct TARP recipients.

This was the second in a series of Finance Committee hearings on the president's proposal. The next hearing is set for May 11.


Fee structure

As proposed in the president's FY 2011 budget package, a fee of 15 basis points (0.15 percent) would apply to the covered liabilities of financial firms that hold assets in excess of $50 billion. Covered firms would include banks, thrifts, bank holding companies, insurers, brokers, securities dealers, and other companies that own or control a depository entity. Covered liabilities would be assets less tier 1 capital, assessable deposits, and insurance policy reserves.

The fee would begin July 1, 2010, and continue for at least 10 years to offset the cost of TARP. It would apply to firms that meet the asset test, whether or not they received TARP assistance. The proposal would raise an estimated $90 billion over 10 years.

Chairman Max Baucus, D-Mont., called the hearing to examine how a bank tax will affect the economy, how it might affect the ability of financial institutions to compete, and what kinds of bank levies other countries are considering. For his part, ranking Republican Charles Grassley of Iowa argued that the president's proposal is of "questionable design," especially since the fee would apply to financial institutions that have not taken any TARP money.


Risk

Geithner emphasized that besides recouping TARP funds, imposition of a bank fee would discourage financial institutions from engaging in risky behavior, since the fee would be pegged to how much risk an institution takes.

In prepared testimony, Geithner explained that the administration "designed the fee so that it would fall most heavily on firms that fund riskier activities with less stable forms of funding. Firms would pay a fixed percentage of their assets adjusted for risk, minus their capital, insured deposits, and certain insurance policy reserves. Firms that take on more risk and fund those activities with less stable sources of financing would pay more than firms that are managed more conservatively. This framework has the significant benefit of including derivatives and off-balance sheet items not otherwise reflected under conventional accounting. In this way, the fee targets, and thereby would help discourage, activities that pose the most risk to the stability of the financial system."

Risk is defined, he said, by current U.S. regulators under U.S. law, and the fee's ability to take risk into account is one of its strengths. He added that structuring the fee as a level tax would make it apply in roughly the same dimensions as the current deposit insurance fee.


Revenue

Grassley reiterated that all revenue garnered from the imposition of a bank tax should go towards paying down the deficit. Geithner agreed, saying that the president wants the money to go towards "covering TARP costs and reducing the deficit." He stopped short of saying that President Obama would veto a bill that does otherwise, however.


Exemptions

Sen. Orrin Hatch, R-Utah, quizzed the Treasury Secretary about the proposed fee's exemptions for certain institutions – specifically, Fannie Mae, Freddie Mac, Chrysler, and General Motors. Geithner responded that in the case of Fannie Mae and Freddie Mac, imposing a fee would be like "one hand of government paying another" since they are semi governmental entities. As for the auto companies, he argued that they did not cause the financial crisis, and that "we've already put them through bankruptcy and restructuring." It would not be appropriate to levy a fee on them in light of those actions, he said.

Sen. Debbie Stabenow, D-Mich., agreed, saying that the auto companies are still undergoing a very fragile recovery. During the hearing, Sen. John Kerry, D-Mass., sought clarification about the fee's application to insurance companies that own brokers or depository institutions for trust purposes. He cited a specific example of an insurer that owns a brokerdealer with limited activity, such as making trades in the funds that support a variable account. Geithner said this situation would not be covered because it does not involve a primary broker-dealer. He also reiterated that a depository institution must have been eligible for TARP funds in order to be subject to the tax.


Small business

Sen. Maria Cantwell, D-Wash., emphasized during the hearing that she would be disappointed if the proposed fee resulted in reduced lending to small businesses. Geithner agreed, and said that Treasury has been working closely with Senate Democratic leadership to craft a bill that encourages small business lending and that includes tax incentives for small businesses.

Baucus later said that his panel will undertake a major effort over the next month to provide robust assistance to small business.


Financial regulatory reform bill

Sen. Charles Schumer, D-N.Y., reiterated his call to add the fee to the financial regulatory reform bill currently under consideration in the Senate. Geithner said that there is a "good case" for including it in the bill, but he deferred to the majority leader to decide the most appropriate place for it.