Financial Crisis Responsibility Fee
In response to widespread disruption and uncertainty in financial markets, President Bush signed the Emergency Economic Stabilization Act into law on October 3, 2008. The centerpiece of that legislation was the Troubled Asset Relief Program (TARP), which authorized the U.S. Treasury to purchase and hold up to $700 billion in assets in order to stabilize the financial system. Section 134 of that Act requires that any shortfall from the TARP program be recouped from the financial industry.
As of December 31, 2009, the TARP program had made gross purchases totaling more than $450 billion. Direct capital injections into financial institutions accounted for approximately half of that amount; most of the rest provided support for the automakers and insurance corporation AIG. After accounting for the roughly $150 billion repaid, the TARP program has net holdings of approximately $300 billion. Recent estimates by the Treasury put the expected fiscal cost of the TARP program at around $120 billion.
The president proposes to assess a 0.15 percent fee on the liabilities of all large financial firms operating in the United States. The fee would apply to all banks, thrifts, bank or thrift holding companies, securities broker-dealers, or any firm owning such an entity on or after January 14, 2010 with consolidated assets of more than $50 billion. Domestic firms would be assessed based on their total worldwide liabilities; foreign firms would be assessed based on the consolidated liabilities of their U.S. subsidiaries. The base would exclude certain liabilities required for regulatory purposes, such as FDIC insured deposits and insurance policy reserves. Other low-risk liabilities, such as repurchase agreements based on U.S. Treasury securities, would receive special consideration. The fee would take effect July 1, 2010 and remain in effect for 10 years or until revenues from the fee fully recoup losses from the TARP program, whichever is longer.
In many respects, the proposed fee acts as a “too-big-too-fail tax,” similar in spirit to deposit insurance. Whereas banks pay the FDIC a fee to guarantee depositors’ accounts against bank failure, the Financial Crisis Responsibility Fee can be seen as a payment for the government’s support during times of widespread financial distress. It is unlikely, however, to discourage reckless lending behavior (such as the subprime mortgage loans at the heart of the current crisis), as expected excess returns on such lending would far exceed the fee.
The Administration estimates that the proposal would raise $90 billion over the next 10 years and increase tax liability for affected firms by as much as 20 percent. Banks could pass at least part of the fee along to customers in the form of higher fees and/or interest rates; that would be more likely to occur for services dominated by large institutions (such as investment banking services). Significant tax avoidance behavior is unlikely because the fee would affect relatively few firms and public attention would be high.
Additional Resources
TARP Transaction Reports, FinancialStability.gov
Financial Crisis Responsibility Fee Fact Sheet, White House, January 14, 2010
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