Brown’s Bank Tax Would Lead to Further Moral Hazard

In his Financial Times column, the British economist John Kay, warns against the “global bank tax” recently announced by British Prime Minister Gordon Brown. If this tax is passed as some kind of insurance scheme for the banking sector, it would only increase the moral hazard implied in the notion of too-big-to-fail financial institutions, thereby amplifying some of the very problems that were at the heart of the financial meltdown. As he writes:

“More likely, by institutionalizing the concept of ‘too big to fail’, the scheme would aggravate the underlying problem of moral hazard. It would also transform state funding of the banking system from an exceptional response to a dire emergency into an expectation, even an entitlement.”

In a new commentary today, I explain why a global bank tax is a bad idea:

“There is nothing to suggest that [a global bank tax] would have hindered the global meltdown. And there is little reason to believe that such a tax would improve the performance of the banking industry when it comes to reducing systemic risk. Quite the contrary, if the tax is perceived as a payment into a global insurance scheme.”

So why is Brown launching this idea?

“Like Obama’s verbal attacks on Wall Street and the recently proposed “Volcker Rule”, this latest attack on bankers by the British government comes at a time when the administration is politically exhausted and in desperate need for rattling up public support. The next British general election is due to take place in May, and Gordon Brown is looking at the almost certain prospect of a solid defeat. This is one reason why the tax most likely won’t come into life. If the Tories take over in May, it seems unlikely that they will propose such a tax at the June G20 meeting.

Another obvious reason for why we should not expect such a tax being imposed, is that it seems unlikely that all G20 countries would ever agree upon such a tax, as some countries would outright reject it and others would come to the realization that by imposing such a tax on their own financial sectors, many financial firms would simply move out of the G20.”

Read the full commentary here.