“Greedy bankers just waiting to re-board the bonus gravy train”, “Make greedy bankers feel the pain of the credit crunch”, “Tax them until their pips squeak”, “Why greedy banks should feel my pain” and “Hands off our wad you bankers!”. These headlines from the world press reflect the growing public outcry over the credit-crunch, bank bail-outs and the continuing large bonus payments payable in the sector.
It is hardly surprising then that western governments are now looking to restructure the banking sector and seek to recoup taxpayer losses. Perhaps it is also not surprising to see that the various government responses have been rather scatter gun, responding to the needs of an angry electorate in each country, rather than focused on a co-ordinated global response.
There have been various “banker-bashing” tax schemes suggested/implemented so far, including:
The UK’s and France’s “super-tax” on banker’s bonuses
The UK’s “super-tax” is a 50% levy on discretionary bonuses over £25,000 paid to bankers between 9 December 2009 and 5 April 2010.
The levy is paid by the banks paying the bonuses rather than the individual bankers themselves. As a result there has been a furore in the UK financial sector with many London based bankers and financial institutions said to be considering a move to lower tax jurisdictions.
France has subsequently followed the UK’s proposals. Paris is working on the details of its levy but intends to bring France into line with the UK by forcing banks to pay 50 per cent tax on bonus pay-outs for 2009 above €27,000 ($39,700).
The “US Financial Crises Responsibility Fee”
The US federal reserve announced earlier this month its initiative to recoup tax-payer losses, a decade long 0.15% tax on the liabilities of banks operating in the US (with assets exceeding US $50 billion). The tax is expected to raise US $90 billion in total, US $11billion or so of which will be raised from British banks operating in the US.
More recently, Obama also stunned the financial world by announcing that he would break up Wall Street by splitting banks who have both “casino” and retail banking operations as part of the same bank. Bank’s involvement with private equity and hedge funds, so called “proprietary trading”, is also to be curtailed.
A Global Transactions Tax?
A global transactions tax was first floated by Gordon Brown at a meeting of G20 finance ministers held in St Andrews in November 2009. Chancellor Merkel said she supported such an initiative “We have committed ourselves to a transaction tax in the financial market”.
Brown recently cited the US Financial Crises Responsibility Fee as evidence that there was growing global political consensus for a bank transaction tax and it is understood that the issue was discussed at a meeting of G7 finance ministers on Monday 25 January 2010.
Britain has said that it would not seek to unilaterally impose such a tax, for fear that it would make British banks less competitive and damage London as a financial centre.
However, Tim Geithner, US treasury secretary, has said the US would oppose such a levy, even though such a tax would be popular with the US electorate.
Cost push inflation in the banking sector?
Concerns have been raised that any additional cost/tax which is levied, will end up being passed onto the banks’ customers.
Probably two relevant questions when considering this are:
1. Are the banks contractually entitled to do this?
2. Would they dare!
Typically, what does a facility letter say?
A typical facility letter will include an additional/increased cost clause similar to:
“If the bank incurs an Increased Cost, then the borrower will indemnify it and will promptly pay to it the amount which the bank certifies as payable. The bank will disclose, in reasonable detail, the basis of its calculation but not any matter which it considers confidential.
For this purpose “Increased Cost” means:
(a) an additional or increased cost incurred by the bank as a result of it having entered into, or performing, maintaining or funding its obligations under this letter; or
(b) a reduction in any amount payable to the bank or in the effective return to the bank under the borrowing facility or on its capital; or
in each case arising as a result of any change, introduction, interpretation or administration of any law or regulation after the date of this letter or any compliance after the date of this letter with any law or regulation relating to reserve assets, special deposits, cash ratios, liquidity or capital adequacy requirements or any other form of banking or monetary control (including controls and requirements of the Bank of England, the Financial Services Authority, the European Central Bank or any other governmental or regulatory authority) or the introduction of, changeover to or operation of a single or unified European currency or otherwise”.
The wording of many facility letters, like that replicated above, is likely to allow banks to seek to impose an additional charge on their customers as the result of a transaction tax, particularly if the tax were specific to loans or certain types of loans. If, however, the tax is less specific to individual loans, and is instead like the US Financial Crises Responsibility Fee, then banks may struggle, on both commercial and legal grounds, to pass the charges on under the terms of their current agreements. Taxes on individuals’ bonuses could not be passed on.
A second possibility is that a transaction tax will have an upward influence on LIBOR, the cost which banks charge each other for funds. If banks charge a higher rate when lending to each other as a result of a transactions tax, LIBOR is likely to become out of kilter with the Bank of England base rate (as was seen during the crises itself but for different reasons then).
Banks often calculate the interest they charge with reference to LIBOR rather than the base rate, so an increase in this rate would have a direct impact on the overall interest being paid by borrowers.
Would they dare?
Demand for banking services is often described as in-elastic. Due to the current scarcity of supply, if banks introduced higher costs, there would not be any discernible drop off in demand for their product.
However, even though (a) they are probably contractually entitled to do so, and (b) the passing on of any banking tax would be unlikely to damage demand for borrowings, many commentators doubt banks would have the courage to pass on the taxes to their customers when their popularity and political capital is at an all time low.
It may also risk the Government finding other ways to tax individual bankers rather than looking at a general levy.
A transactions tax is likely to be bad news for borrowers, who may pay more for their loans in the long term either through additional cost clause payments or higher interest payments.
In light of this, governments should also look at alternatives including tightening up the regulatory regime or imposing restrictions on the size / risk taking of our banks.
Fox Williams LLP is a business law firm based in the City of London. We are dedicated to providing clients with the highest quality of legal service.
Please contact Paul Taylor if you would like to know more about any of the matters mentioned in this article or simply to discuss our particular approach to your legal needs. Paul is a partner in our Corporate department and advises clients on a broad range of business areas, including mergers and acquisitions, joint ventures, private equity, banking and insolvency.