Financial Industry Warns that Bank Tax Would Have Dire Effects

Last Updated Jan 12, 2010 11:34 AM EST

Wall Street is biting the hand that gorges it. News that the White House may hit banks with a tax aimed at recouping TARP funds brought these responses from financial industry trade groups today:
"The industry is starting to recover, the economy is starting to recover, and a tax would hinder both the industry and the economy -- and for that matter, the American people," said Scott Talbott of the Financial Services Roundtable, a trade group that represents the largest financial companies.

"To impose yet another burden on the industry would obviously decrease their ability to lend," said Edward Yingling, president of the American Bankers Association, a trade group.

"In our industry, costs are typically passed along to institutions and individual investors, so the burden will likely fall on them," said Timothy Ryan, president of the Securities Industry and Financial Markets Association.

Human sacrifice, dogs and cats living together! Mass hysteria! It's classic scare-mongering, of course. The giveaway is that no details of the tax have yet been disclosed. So despite such ululations, it's impossible to know what impact it would have on the industry, economy and American people.

Besides, banks aren't lending away. Although institutions earned a total of $2.8 billion in the third quarter, total loan and lease balances fell more than $210 billion, the largest percentage decline on record, according to the FDIC.

Bankers have two main concerns. First, and understandably, they don't want to pick up the tab for other companies. Most of the losses on TARP, which as of Sept. 30 stood at $68.5 billion, are from AIG (AIG) and U.S. automakers.

More important, banks fundamentally oppose public policy that could dent their earnings, which the tax unquestionably would do.

"This would be another headwind for the largest banks, and part of our theme that the government is going to make it much more expensive to be a bank," said analysts with investment adviser Concept Capital, in a report this morning. "That means profit margins will be lower than they have been historically."

The industry groups are right on one thing -- an additional fee on banks would likely get passed along to customers. That's how financial institutions are coping with new laws restricting overdraft fees and credit card rates.

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    Alain Sherter covers business and economic affairs for CBSNews.com.