Factbox: What the IMF is telling G20 on bank levy, economy

BUSAN, South Korea (BestGrowthStock) – The International Monetary Fund is providing reports to Group of 20 finance ministers and central bankers to aid their debates on bank levies, rebalancing global growth and the economic outlook.

Following are key details of the three reports, provided by an IMF official:


— The IMF’s final report on policy options for bank taxes recommends that financial institutions pay levies similar to insurance premia to cover the costs of failures of financial firms. This would be based on risk-weighted liabilities.

“The more risk you create, the more you should pay,” the official said.

— The IMF favors collecting the levies before a financial crisis hits. If collected after an incident, as the U.S. Senate has proposed, the tax would carry “survivor bias” — costs of bank failures would be paid only by surviving institutions, not failed firms laid low by their own risk-taking. It is not recommending whether countries hold the money in a special “bailout fund” or as general revenue.

— An alternative format for such levies is a financial activities tax, based on a firm’s profits and the remuneration paid to its top executives. This would be more effective and create less distortion than taxes on transactions and it should fall broadly on all systemically important institutions.

— The rationale for the levies is that no matter how strong and effective financial regulatory reforms are, there will still be cases of institutional failure. The official likened it to the persistence of traffic accidents despite strong safety laws. “There will be an expected net cost of failure. The question is who (should pay) and how would those costs be borne,” the official said.

— Arguments made by some countries that they do not need a bank levy because their institutions did not fall victim to the financial crisis are “short-sighted” in the IMF’s view. Future crises should not be discounted, and taxes could be applied in a very broad manner in the case of emerging markets.

Although the levies are not a “one-size-fits-all” proposition, the IMF believes that imposing bank taxes in some countries and not others could lead to regulatory arbitrage by institutions seeking lower-tax jurisdictions.


— Structural reforms to increase savings in big consuming countries like the United States and to boost domestic demand in big exporting nations like China must be coordinated. Otherwise there could be a negative impact on global growth, the IMF says.

If advanced economies cut deficits and boost savings without adjustments in emerging economies to reduce reliance on exports, there will be less short-run growth. Developed countries might enjoy more long-run growth if they are on a firmer fiscal footing, but emerging economies would suffer lower growth both in the short term and long term.

— If these actions are coordinated, however, the IMF believes there are substantial benefits for both advanced and developing economies. The fund estimates that if needed policy adjustments are adopted consistently and coherently, global growth could increase by as much as 2.5 percent annually over a five-year period against a baseline of no significant policy changes.

“The result would be a substantial increase in employment — tens of millions of jobs created additional to what would be the case without these policy moves,” the official said.

— The key reforms needed in advanced economies are fiscal deficit cuts and steps to encourage savings. Structural reforms to provide social safety nets are needed in emerging economies. Export-reliant economies need to boost domestic demand.

— The IMF views the G20’s discussion on rebalancing global growth as the group’s single most important undertaking. The official said that G20 members seem realistic about what is needed to rebalance the world economy. Not all countries, for example, intend to export their way out of their economic difficulties. “No one is planning, in essence, that someone else is going to solve their problems.”


— The third report submitted by the IMF reaffirmed forecasts in its World Economic Outlook issued in April, which projected global economic growth of 4.2 percent in 2010.

— Advanced economies will grow just 2.3 percent in 2010 and 2.4 percent in 2011, while emerging and developing economies will grow 6.3 percent this year and 6.5 percent next year.

— The official said the financial turbulence emanating from Europe has “added to the realism of the downside risks that were already described in the World Economic Outlook.”

— Overall, the report predicts a recovery this year that is clear-cut but modest by historic standards.

— The report notes the need to maintain low inflation expectations in the medium term. But, given the degree of resource slack, most advanced economies have “the ability to retain a fairly accommodative stance.”

— The IMF report shows that while deficits are elevated because of measures to stem the financial crisis, only about 10-20 percent of the increase is a direct result of government support measures. The rest is due to the fact that recession dented incomes and revenues. This provides hope that restoring growth will help ease deficits by itself. But the official noted, “It’s clear that fiscal policy will have to be adjusted to underpin confidence in fiscal sustainability.”

Stock Market Investing

(Reporting by David Lawder, editing by Alan Wheatley)

Factbox: What the IMF is telling G20 on bank levy, economy