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02 December 2009

IMF: preparing a report on financial sector tax options for G20 to recover bail-out costs

This report will be ready for the next June’s G20 Meeting. The report will consider different options including a transaction tax. “The financial sector should contribute to the cost of the rescue and to limiting recourse to public financing in the event of a future crisis”, Mr Strauss-Kahn said

IMF First Deputy Managing Director John Lipsky said: the International Monetary Fund is examining policy options, including a possible tax on the financial sector, for how governments can recover the billions of dollars in public support used to prop up the banking and financial system during the current crisis. It is also considering how best to meet potential future costs.

In a speech in Vancouver Lipsky said both the general public and financial market professionals were shocked by the scale and scope of public support that has been required to stabilize the financial system over the past two years. The huge public support helped to avoid more serious damage, but the eventual net cost of intervention remains uncertain.
At a summit in Pittsburgh in September, leaders of the G20 industrial and emerging market countries tasked the IMF with preparing a report in time for their June 2010 meeting. This will set out a range of options countries have adopted or are considering as to how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking system. A preliminary version will be prepared for discussion at the April 2010 G20 ministerial meeting.
IMF Managing Director Dominique Strauss-Kahn warned in London last month that there would be no public appetite for any future bailouts. ‘Let me say that the financial sector should contribute to the cost of the rescue and to limiting recourse to public financing in the event of a future crisis. I suggest this for practical reasons because, in my view, there would not be political support in parliaments for a rescue on the scale we have seen during this crisis.’
Complex issue
‘This is a complex and contentious issue, ‘Lipsky said in his speech at the November 30 event organized by the Bank of Canada. ‘ But despite the acceptance of the idea that deposit insurance is typically paid by a banking levy, this topic up to now has received surprisingly little systematic attention and analysis. In particular, there is an obvious trade-off between introducing more constraining regulation - that could limit prospective risks, but reduce the scope for the financial system to allocate capita - and creating mechanisms to compensate for the potential cost of risk mitigation.’
Lipsky, who is heading an IMF group tasked with preparing the report, pointed out that there were two separate issues under debate:
• Whether and how to recoup the costs of the net support already provided
• How to create a mechanism to cope with potential future costs.
‘Both issues are relevant and related, but they need to be analyzed independently,’ he added.

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