The invaluable David Leonhardt has an important article today about the bank tax and resolution authority.
First, it strongly endorses a bank tax. Different from a financial transactions tax, a bank tax, along the lines of the liabilities assessment introduced by the Obama administration would work to recoup the remaining losses from the TARP fund. There are very good arguments for this kind of assessment -- Matt Yglesias has made most of them -- but in terms of legislation this policy is not part of the financial regulatory overhaul but is rather part of the budget and tax process. There's nothing in the financial-reform bill that necessarily conflicts with this tax -- unless, maybe, the Brown-Kaufman amendment is passed and succeeds in shrinking the financial sector.
But there is some confusion because the financial-reform bill as it stands also includes a special assessment on banks to create a $50 billion fund that would be used by the FDIC to liquidate failing banks. I consider this mechanism to be fundamentally different from a tax, which is intended to be returned to the Treasury as a public good and as a check on Wall Street, whereas the fund is held in check and only deployed in case of emergency. How you pay for liquidation authority doesn't really have a major effect on how that authority works in practice, although I prefer the ex ante assessment because banks put their skin in the game immediately, and it eliminates any excuses regulators may make about not having resources during a crisis.
Leonhardt goes after this liquidation authority, pointing out the widely recognized problem of internationally held assets and suggesting the bill doesn't give regulators a narrow enough choice to avoid bailouts. Setting aside the point that banks can and do avoid both size caps and taxes with the same tactics, I still disagree, in part because this law does do a good job preventing regulators from funneling money to institutions they don't liquidate.
Supporters of these liquidation authorities recognize the importance of working to develop international agreements that would make international resolution simpler, but point to a few provisions that might alleviate some of the international problems. One is new powers for regulators to examine the books of subsidiaries and involve foreign financial supervisors in those discussions; another is the much-debated funeral plans: Firms and regulators would have to come up with a preset plan about how to deal with an international subsidiary during a failure, something that hasn't been done before and would give both parties more preparation to solve that problem in advance. If they are unable to do so satisfactorily, regulators can go so far as to force these firms to divest their foreign holdings.
That means a lot rides on appointing the right people to these agencies, something that is true no matter how the bill is written. International agreements will be a challenge, but at the same time there is an international consensus that getting these structures in place is critical. For example, financers and regulators in the UK are still angry that Lehman was able to move $50 billion from its London subsidiary back to the U.S. right before its bankruptcy, suggesting an effective system is in everyone's interest.
-- Tim Fernholz
