IMF Considers Levy on Banks Based on their Risk to Global Economy

The International Monetary Fund (IMF) has been considering various plans for encouraging a common global response towards economic crises. One of the proposals it is considering is a levy on banks depending on their impact on the global economy.

The idea of the proposal is to make a fund that can be used in case of any future global crisis. The amount of levy would depend upon the degree of risk posed by the financial institution to the economy.

Different kinds of levies to achieve the same purpose are being recommended by almost all countries. France and Germany have proposed a broad bank tax. The U.S. has come up with the idea of a crisis responsibility fee. However, none of these proposals take into account the systemic risk posed by various financial institutions and they do not prevent them from affecting the global economy negatively.

The IMF has recommended a capital surcharge that would vary according to the risk taken by an institution and the damage it will cause if it collapses. This surcharge would be set aside by the institution whenever it engages in risky transactions or gets too interconnected with other market players. The surcharge would be more like a reserve instead of a tax, and it would be proportional to the collateral damage that would be caused if the bank collapses.

According to the IMF, this surcharge would make the law of major countries uniform in dealing with a future crisis. Current laws on minimum reserves that banks have to maintain have proved to be insufficient when a bank indulges in complex transactions that pose a risk to many other entities. The monetary value of the proposed surcharge would be huge and it will build a buffer to deal with a crisis. Further, due to the high value of the surcharge, banks would be discouraged from acting irresponsibly.

The IMF has dismissed claims that it is promoting the ‘too big to fail’ theory because of which various banks were helped during the crisis as their failure would have had serious ramifications.

Considering that the IMF does not have the direct power to impose such a surcharge, it would have to build consensus among different countries about its proposal. This wouldn’t be easy, as the strong bank lobbies in various countries would try to block these reforms.