A development in the delicate balancing act that is US financial reform:
NEW YORK (Reuters) – The Obama administration is considering exempting U.S. Treasuries from its proposed new tax on banks in order to prevent disruption in the world’s most important funding market, market sources said.
Wall Street fears President Barack Obama’s proposed tax to recover bailout funds could deter banks from tapping short-term loans in the repurchase market — also known as the repo market — ultimately making borrowing more expensive.
Bankers have taken their concerns to the Treasury Department, which says it is aware of the potential pitfalls and is weighing ways to side-step them.
Sources familiar with the discussions said the suggestions included a carve-out for Treasury securities in the assessment of the new tax — which the White House wants to levy on non-deposit liabilities of banks with assets over $50 billion — or a method of risk-weighting assets so that risker instruments would be taxed at a higher rate than safer, more liquid securities such as Treasuries.
The Financial Crisis Responsibility Tax, or FCRT, equated to a fee of 15bps on all non-FDIC insured liabilities for banks with more than $50bn in assets, over the next 10 years.
15bps is small change to most banks but not for repo markets, an important source of bank funding.
Repos are essentially a sale of securities, mostly US Treasuries, with an agreement to repurchase the same securities at a later time. Spreads earned on these transactions are nowhere near 15bps, prompting market commentators to warn that the tax would collapse the whole market.
So exempting Treasuries from the FCRT would definitely help. But the repo market could still be in trouble.
Plenty of market-types have also been complaining about the Financial Reform Bill, which could impose losses on certain secured bondholders, which, some say, could also reduce the stability of repo funding.
One problem after another, then.
Related links:
Financial reform checklist – FT Alphaville
Proposed US tax would hit repo industry - FT
The insecurity of the unsecured creditor – FT Alphaville