Fixing market consequences requires partial sacrifice of key reform aim.
The Obama administration’s plan to levy a 15 basis point tax on non-deposit, non-Tier 1 bank liabilities appears to be unraveling. The problem with the still-vague Financial Crisis Responsibility Fee, proposed in mid-January, is that bankers say it will gut the $3.8 trillion repo market. They argue that the 15bp fee, meant to raise $90 billion over 10 years, would wipe out the returns on these short-term liabilities, which account for a large percentage of financial sector liquidity. This could limit banks’ ability to fund assets—mortgages, corporate loans, even longer-term treasury securities.