An exercise.
(Reuters) Obama’s bailout fee would be approximately 15 basis points, or 0.15 percentage point, of covered liabilities. This would be determined by looking at a firm’s total assets and subtracting their tier one capital, which includes their common stock, disclosed reserves and retained earnings, as well as FDIC (Federal Deposit Insurance Corporation) deposits for banks, or insurance policy reserves for insurance companies.
Which, in formula form, should work out to the below:
(Total Assets – Tier 1 – FDIC-insured deposits) * 0.0015 = Obama’s bank levy.
We know the Obama administration thinks the fee will raise $90bn over the course of 10 years, but we don’t know the exact impact on individual institutions — mostly because we don’t know what percentage of their deposit base is FDIC-insured (FDIC covers up to $250,000 for individual deposits).
But we do know that some banks, like JP Morgan and Wells Fargo, have bigger deposit bases than others.
The point is that this isn’t so much a punishment for banks which tend to fund themselves via deposits (the rationale being that they pay into the FDIC fund) — but a direct smackdown for America’s investment banks. The reasoning is, as the FT’s Krishna Guha puts it:
The rationale for the formula is that deposit-taking banks paid a fee to the Federal Deposit Insurance Corporation to insure their deposits in the years before the crisis. This will have the side-effect of encouraging banks to rely more on retail deposits, a stable form of funding.
The big question then, is will the levy be enough to change investment banks’ ways?
A quick, very rough back-of-the-envelope calculation, has Goldman Sachs, for instance, paying a very conservative (i.e. assuming all of its deposits are FDIC insured, which is unlikely) 2008 figure of:
($884.55bn – $62.64bn – $27.64bn) * 0.0015 = $1.19bn.
Or, less than a tenth of the $10.93bn the bank spent on compensation and benefits that year.