New Bank Tax Part II: Reducing Capital Hinders Lending

Yesterday, we discussed the new tax the Obama Administration proposed to pay for losses of non-bank TARP programs. This tax would be levied on financial firms with at least $50 billion in assets, and would certainly increase the cost of credit, as some portion would be passed along to borrowers.

In addition, the new tax will cause banks to reduce lending as it potentially reduces bank capital. One dollar in capital supports roughly seven dollars in loans. Thus, the incidence of this tax could reduce lending by $630 billion, enough to fund 3.75 million small business loans over the next decade.

Moreover, some banks that are approaching the $50 billion threshold may decide to slow their growth to avoid being hit by this tax. This further limits lending and economic growth over the duration that the tax is in place.

Also see:

• Part I: Increases the Cost of Credit
  
• Part III: Community Banks Not Immune
• Part IV: The Markets Don't Like It