Wednesday, January 20, 2010

A bank tax as a retroactive insurance fee

Douglas Diamond and Anil Kashyap make a forceful case for a tax on banks to recoup TARP losses. They propose a tax that is proportional to the size of each bank's bailout, a retroactive fee for insurance that should have been assessed prior to the crisis. A notable difference is that the fee is based on ex post realizations of risk rather than ex ante assessments, like insurance usually is, so it reduces the implicit risk sharing across banks that FDIC insurance would impart, for example.