New Bank Tax Part IV: The Markets Don't Like It

In this last post in a four-part series on the new $90 billion tax on banks proposed by the Obama Administration, we show that the markets hate this idea. If our arguments about this tax increasing the cost of credit, slowing lending, and hitting community banks haven't convinced you, then consider this:

When the news of the tax was reported in the financial press, the KBW bank stock index fell by 1.70 percent on that day. On a market adjusted basis, the index declined by 0.76 percent.*

For the 24 large cap banks in the index, twenty posted a negative daily return on January 12, as shareholder wealth declined by $16.44 billion. Including both Goldman Sachs and Morgan Stanley, the Administration’s proposed fee destroyed almost $20 billion in shareholder value in one day.

Also see:

• Part I: Increases the Cost of Credit
  
• Part II: Reducing Capital Hinders Lending
• Part III: Community Banks Not Immune

* Market adjusted return subtracts the daily return of the S&P 500 from the daily return of a company’s stock or index.

New Bank Tax Part III: Community Banks Not Immune

In this series of posts on the new bank tax the Obama Administration has proposed, we have reviewed how:

• the new tax will increase the cost of credit
  
• the new tax will cause banks to reduce lending as the tax reduces bank capital

Today we see that, although community banks will not be paying the tax directly, since their assets are less than the $50 billion threshold, community banks will still feel the effects of this tax.

Since this tax is imposed on non-insured liabilities, impacted banks will shift their funding mix away from these sources and rely more heavily on insured deposits. The increased competition for insured deposits will pinch net interest margins at community banks as they compete with larger banks for deposits. Not only will this tax reduce profits for community banks, but also impede their ability to build capital and slow lending across the country.

Also see:

• Part I: Increases the Cost of Credit
  
• Part II: Reducing Capital Hinders Lending
• Part IV: The Markets Don't Like It

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

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