How would you feel if you saw the following headline:
“Gas stations to be saddled with major new tax on gasoline”
Perhaps you might suspect that motorists will ultimately pay the higher gas tax.
OK, so tell me how you feel reading this Bloomberg headline:
Big Banks to Be Saddled With Tab for SVB, Signature Depositors
This might sound good to many Bloomberg readers. Big banks keep taking risks, which leads to government bailouts. Sounds good to require them to pay for cleaning up the mess. But on closer inspection, is this any different from the gasoline tax?
In its May proposal, the FDIC said that the extra fees, known as a special assessment, would be collected at an annual rate of about 12.5 basis points over the eight periods. The proposed formula was based on criteria, including the amount of a bank’s deposits that are uninsured.
Fee is a more polite term for tax. FDIC fees are a tax on bank deposits. In my view, bank customers will eventually end up bearing most of the cost of FDIC fees.
As in so many other cases, “who pays” is not a useful way of thinking about taxes. In the end, all taxes are paid by people. And it’s very difficult to estimate the incidence of a tax, the proportion paid by people in different income categories, especially in the long run (which is what matters.).
It is much more useful to think about the impact of taxes on incentives. Our deposit insurance system bails out the depositors of risky banks and then puts a tax on safer banks to pay for those bailouts. How would you expect that system to impact bank behavior?
PS. Check out Alex Tabarrok’s new post for a visual presentation of the impact of taxes on behavior.
READER COMMENTS
Thomas L Hutcheson
Nov 16 2023 at 11:08pm
But who people THINK pays does make a difference. I suspect that one reason that some “environmentalists” prefer trying to block fossil fuel transportation projects instead of taxin net emissions is the idea that it affects only company profits but does not cost consumers anything. Which ironically is more or less true and the reason that tax es on CO2 emissions is better. 🙂
Jon Murphy
Nov 17 2023 at 9:23am
Wait, are you saying that consumers have a perfectly elastic demand curve for all products that generate carbon emissions?
Thomas L Hutcheson
Nov 17 2023 at 10:37am
Did I say perfect?
Jon Murphy
Nov 17 2023 at 4:52pm
Sorry, let me detail my line of reasoning to see where I misunderstood you.
You said:
I understood your reason (alluded to in the second sentence) as meaning that a carbon tax only affects corporate profits.
Furthermore, I interpreted your use of the word “only” in the first sentence as to mean that corporate profits are affected, and nothing else.
Thus, combining the two, I understood your second point to mean that only corporate profits and not consumer surplus will be affected by a carbon tax. That will only be true if consumer demand for carbon products is perfectly elastic (otherwise, the consumer will bear some part of the tax, and thus the tax will not “only” fall on corporations).
Trina Halppe
Nov 17 2023 at 2:02am
Is there a better term for this than “bank behavior”? The phrase “bank behavior” suggests the problem was at the decision makers employed by SVB. This seems obvious because where else does behaviour come from but from the makers of decisions that manifest in behaviour? However, we should be able to presume that the decision makers wanted to continue to be employed at SVB, preserve their reputations and most of all the value of any equity and call options that they held in their employer. Since it was the depositors in SVB that provided the capital to the decision makers at SVB, the depositors are the enablers. Regulation and law created the environment that motivates depositor behaviour. If depositors and regulators are to blame, should we call this something other than “bank behaviour”?
Blaming depositors to some extent is probably an unpopular opinion and a weird thing for me to say because I believe it may not be feasible or practical for most depositors to monitor banks. However, if I recall correctly, you think depositors should do more to monitor banks, so I posed this question about the phrase “bank behavior”.
Jon Murphy
Nov 17 2023 at 6:18am
Bank behavior is still the right name. As you note, it was the decision makers at SVB who made the decisions. True, a regulatory environment may create incentives that lead to a certain kind of behavior. But incentives are not mind control. They incentives didn’t make them chase the yield curve. They chose to do that knowing the risks.
vince
Nov 17 2023 at 3:49pm
Just like they did in the GFC. It was worth it. Especially when you are TBTF. Or have connections like Goldman.
Thomas L Hutcheson
Nov 17 2023 at 10:45am
Regulation to prevent people from making unwise decisions is not NECESSARILY bad. But more to the point once we have prudential regulation at all, depositors cannot be blamed too much for assuming that regulators are regulating all risks. In the case of SVB, regulators apparently were going along with taking on large interest rate risk.
Scott Sumner
Nov 17 2023 at 12:42pm
I’m not really blaming banks or depositors, I’m blaming policymakers.
vince
Nov 17 2023 at 3:46pm
Especially if they deposit more than the FDIC limit. But, once again, those risk takers got bailed out at the expense of those who didn’t take the risks.
Peter Gerdes
Nov 17 2023 at 3:24am
Actually, I’d expect the impact of this tax to be largely positive.
First, it does genuinely transfer the costs from the taxpayer to the insured party — individuals or companies keeping substantial sums in bank deposits. This is desierable because it allows you to avoid paying the costs simply by moving your money into a different asset and, more importantly, defangs political opposition to bailouts necessary to protect the financial system.
As far as the moral hazard issue, it seems worthwhile to remember that there are substantial positive externalities from lending innovators money so it may actually be desierable to internalize some of that externality by subsidizing riskier loans.
Thomas L Hutcheson
Nov 17 2023 at 10:52am
There are benefits to lending to innovators, presumably at rates higher than for low-risk inventory loans, but externality that deserves a subsidy?
Sure there is that that the benefits of a successful innovation will be grater than what is captured by the innovating firm, so there IS an argument for Pigou subsidization of the “innovation” externality But I would dispute that doing so via prudential regulation/FDIC insurance rules is the way to provide that subsidy.
Scott Sumner
Nov 17 2023 at 12:46pm
The problem is not that banks bear a burden, it’s that the wrong banks bear the burden. Safe banks subsidize risky banks.
And the problems in the banking system have little or nothing to do with lending to “innovators”. (VC can handle that.) Much of the losses are loans to developers of real estate projects, etc.
The depositors can’t distinguish a bank doing a good job lending from one doing a bad job and covering it’s ass by picking up assets with substantial but non-obvious future risks.”
They certainly did do this before FDIC. Now they have no incentive to monitor banks.
Peter Gerdes
Nov 17 2023 at 3:32am
Also, I’d note that the problem with your moral hazard analysis is that it tacitly assumes that absent the FDIC the decision makers at banks would be incentivized to invest in a manor that efficiently balanced risks with returns. This is almost certainly false.
It’s a classic information asymetry problem. The depositors don’t have the information necessary to fully evaluate the banks overall exposure to risk — indeed even if they were willing to put in the effort to do this they couldn’t reasonably evaluate this. The executives always have an incentive to pick financial products that produce immediate profits that impose substantial risks in the future (ideally after they’ve moved to a new job). The depositors can’t distinguish a bank doing a good job lending from one doing a bad job and covering it’s ass by picking up assets with substantial but non-obvious future risks.
As such, I fear that banks essentially are already going to have all the incentivizes necessary to behave recklessly and the transaction costs of individualized monitoring would be prohibitive.
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