IMF expands on bank-tax ideas
The International Monetary Fund has listed a range of charges it says banks could pay to help limit systemic liquidity risk in the banking system.In its latest Global Financial Stability Review, part-released on Wednesday, the IMF highlights the challenge of this risk.Systemic liquidity risk is the risk that many players in the financial system will all suddenly find it hard to raise new short-term funds. Financial institutions tend to underestimate this risk during good times, the IMF says, and then rely on central banks to provide emergency liquidity during bad times.The IMF wants financial institutions to share more of the burden of systemic liquidity risk through a "price-based assessment". Possible charges on institutions include capital surcharges, fees, taxes, and insurance premiums paid to central banks in return for access to liquidity when needed.The Basel III rules aim to prevent individual banks from running into liquidity problems. But those rules do not address the "systemic" problem, that connections between institutions could trigger a wave of liquidity shortages.The tougher capital charges now being implemented to minimise bank insolvencies could help reduce liquidity risk as well, the IMF notes.The IMF recommended a year ago that banks should pay a "financial stability contribution" on their liabilities, to compensate for the protection they receive from central banks during financial crises. That recommendation has been largely ignored in Australia.