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New bank taxes will reduce future crisis: IMF

April 23, 2010 12:23 IST

TaxThe International Monetary Fund on Friday justified its proposal to impose new taxes on the financial industry, arguing the levies would reduce the chances of a future crisis as it would help curb risk-taking behaviour among banks.

"Our belief is that the tax system can help to reduce the likelihood of a future crisis along with regulation, of course.

"Taxation will not do everything by itself; regulation has its role to play," International Monetary Fund managing director Dominique Strauss-Kahn told reporters at a news briefing held at the IMF headquarters in Washington on Friday.

He said the IMF has proposed the taxes, having in mind two goals: to secure some resources to be able to help in crisis resolution, if any, and to have a tool that will help curb risk-taking behavior among banks.

Strauss-Kahn said the draft tax paper would be discussed by the G-20 ministers.

The draft paper outlines a possible 'financial stability contribution' that would be based on the threat that a firm's collapse would pose to an economy.

The levy, the IMF said, should raise an equivalent of at least two per cent of a country's economic output  -- about $300 billion in the US -- and set it aside to underwrite the cost of seeing banks through bankruptcy.

"Multilateralism and political policy cooperation is obviously the great legacy of this crisis and our point is that it has to be maintained in a post-crisis world.

"From this point of view, the G-20 MAP, the Mutual Assessment Program, is very promising. It starts now; we will have the first run, as you know, at the G-20 on Saturday.

Of course, it is a process which has to be improved. It is a learning-by-doing process and the first time we are doing it, but already I think that it is really interesting," he said.

Noting that it was time financial sector reforms were undertaken, he said, "In our view, in the IMF we need agreement on three key areas by the end of this year.

One concerns the rules pertaining liquidity and capital, pertaining to capital liquidity and capital; the second area has to do with the toolkit which is needed for addressing systemic risks; and the third concerns the framework for cross-border resolution issues."

Strauss-Kahn said more attention has to be paid to the supervisory side, which is the most important.

"You may have the best possible regulation, if it is not enforced, if you do not have supervision, it is just as if you did nothing," he argued.

Lalit K Jha in Washington
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