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IMF exploring insurance levy on banks

The International Monetary Fund is exploring the idea of making banks pay insurance fees to fund any future rescues in the sector, IMF managing director Dominique Strauss-Kahn said.

He said such a tax would be in line with a proposal at the weekend by British Prime Minister Gordon Brown, who urged world governments to consider imposing a levy on banks.

Strauss-Kahn, speaking by telephone to Reuters, said his organization was not pursuing a global tax on financial transactions -- a so-called “Tobin tax” -- which was one of several options floated by Brown.

But British media reports suggesting there is a split between the IMF and Britain on the fundamental idea of imposing a levy are wrong, Strauss-Kahn said.

“We're not working on a Tobin tax at the IMF” because such a tax would risk being unworkable, he said.

“We're working on a tax on the financial sector which, in line with what Gordon Brown said, would solicit an insurance premium from a business activity that is riskier than others.”

The IMF will present concrete proposals for the tax next April to finance ministers of the Group of 20 leading economies, for review before submission to G20 leaders in June.

Brown's statement at a G20 meeting in Scotland on Saturday marked a shift for Britain, which had previously backed away from supporting a global tax on banks given London's pre-eminence as a financial center.

Facing public criticism for spending tens of billions of pounds in bailing out British banks, Brown said it was time for banks to give something back to society.

“There have been proposals for an insurance fee to reflect systemic risk or a resolution fund or contingent capital arrangements or a global transaction levy,” he said.

Soon after Brown spoke, US Treasury Secretary Timothy Geithner rejected the idea of an across-the-board tax on financial trading.

“A day-by-day financial transaction tax is not something we are prepared to support,” Geithner told Britain's Sky News.

But on Sunday, Strauss-Kahn said he did not take this as a death-knell for tax ideas which the IMF was studying. The IMF is a key player in the tax debate because G20 leaders, meeting in Pittsburgh in September, asked it to help reform the global economy and financial system.

“What Geithner said was, 'we're not in favor of a day-to-day tax.' That day-to-day tax is effectively something akin to a Tobin tax,” Strauss-Kahn said.

“But he did not shut the door on tax, no more so than (US President Barack) Obama in Pittsburgh, to a contribution from the financial sector toward the risks it generates, but which is not a day-to-day tax.”

Strauss-Kahn said regulators and governments were now working on two fronts: tougher regulation of banks to prevent future crises, and the levy to fund future bank bailouts if needed, which would limit the cost to taxpayers.

Regulators are drafting stricter rules for banks under the auspices of the Financial Stability Board, another international forum. If the new regulations are strong and respected enough, the levy on banks will be less necessary, Strauss-Kahn said.

But if governments ultimately balk at imposing tough regulation, the levy would be there to offset that dilution, he added. “It's a tradeoff.”

Asked whether governments might have difficulty agreeing on controversial and technically complex details of a levy on banks, Strauss-Kahn replied:

“The mandate came from G20 leaders. At least in Pittsburgh they agreed to work on this.”

“Will they agree to implement it? I'm not divine so I can't tell you for now what will happen next June.” (Reuters)