New Bank Tax Part I

The Obama Administration has proposed a Financial Crisis Responsibility Tax on financial firms with at least $50 billion in assets to pay for losses of non-bank TARP programs. The proposed tax will adversely impact bank earnings, raise the cost of credit, reduce lending, increase deposit competition, and slow the economic recovery.

The proposal imposes a tax of 15 basis points on non-insured liabilities for at least the ten years. The Obama Administration projects that this fee will raise $90 billion over this period. This tax will act as a drag on bank earnings, reducing normalized earnings by an estimated 5 percent over the next 10 years. This tax has many other consequences.

Over the next few days, we're going to be reviewing this tax and the negative implications it holds for borrowers, the economic recovery, and community banks.

The $90 Billion Tax on Banks Increases the Cost of Credit
The proposed tax will cause the cost of loans to increase as simple economics suggests that some of the tax will be passed through to borrowers. This will increase interest rates by up to 15 basis points. In the current interest rate environment, this would amount to a 2 percent increase in the cost of credit, further impairing the ability for consumers and small businesses to borrow.

Also see:

• Part II: Reducing Capital Hinders Lending
• Part III: Community Banks Not Immune
• Part IV: The Markets Don't Like It