During a mostly uneventful confirmation hearing today, Jack Lew, President Obama’s nominee for Treasury Secretary, revived the idea of implementing a Financial Crisis Responsibility Fee. The fee, meant to be applied to the nation’s biggest banks for their role in the 2008 financial crisis, was proposed by the administration in 2010, but went nowhere.
During a discussion with Sen. Sherrod Brown (D-OH0, Lew suggested the fee as a possible remedy for banks that are too-big-to-fail:
BROWN: Don’t you think it’s unfair for these banks, $2 trillion banks in at least a couple of cases, these megabanks to receive government subsidized funding advantages that community banks in West Akron or Pomeroy or Sycamore, Ohio don’t get?
LEW: Senator, the administration has proposed a financial responsibility fee that would fall on those large banks, which is something that we think is the right way to assess responsibility for past burdens put on taxpayers. In terms of the access to different borrowing windows, I’d be happy to follow up with you on the differences between access and community banks and large money center banks. But in general, our view is that we have to distinguish between the large banks that create risk to the system and smaller institutions that are less likely to. And we’ve tried to put less burdens on the smaller banks.
The administration has framed this fee from the beginning as only useful in order to recoup losses from the financial crisis. But it would be extremely useful as a permanent fee on the biggest banks for two reasons: it would mitigate some of the advantages enjoyed by the biggest firms and would raise needed revenue from a sector of the economy that can afford it.
As Minneapolis Federal Reserve President Narayana Kocherlakota noted, a bank tax has the benefit requiring huge banks to internalize some of the cost of their extreme growth and risky activities. “Financial institutions fail to internalize all the risks that their investment decisions impose on society. Economists would say that bailouts thereby create a risk ‘externality.’ There is nearly a century of economic thought about how to deal with externalities of various sorts — and the usual answer is through taxation,” he said. “Taxes are a good response because they create incentives for firms to internalize the costs that would otherwise be external.”