IMF mulls bank-failure insurance

The International Monetary Fund is open to a plan that would see banks contribute to an insurance policy against a future economic collapse, the agency revealed on Friday.

"Considering that the financial sector is creating a lot of systemic risk for the global economy," said the fund's managing director Dominique Strauss-Kahn, "it is just fair that such a sector would pay some part of its resources to help mitigate the risks that they are creating."

Deputy director John Lipsky has been dispatched to head a task force to look at what measures would be appropriate.

The lack of an adequate insurance facility for the global economy has led many emerging markets to self-insure by building excessively large buffers of foreign reserves. There are fears that has contributed to global financial instability by creating widening wealth disparities.

The fund did not release details of what form the insurance fund might take, but Strauss-Kahn stopped well short of backing plans for a so-called Tobin tax — a flat tax on currency transactions named after the Nobel Prize laureate James Tobin.

Tobin first made his proposal in the early 1970s when U.S. President Richard Nixon ended the dollar's convertibility to gold and effectively brought an end to the global currency system that had prevailed since the Second World War.

Tobin said the tax would help limit instability arising from a world of floating exchange rates such as the one in which the world finds itself today.

At a summit of G20 leaders in Pittsburgh last week, the IMF was asked to come up with proposals for some sort of global bank insurance fund.

"We're going to be asking the question: Is there a fair, equitable and efficient way to think about charging the financial system for the potential costs of insuring the system, in the way that banks typically pay for deposit insurance on their depositors?" he said.

"[But] the very simple idea of putting a tax on transactions won't work for many technical reasons," Strauss-Kahn said Friday in Istanbul, where the IMF is holding its annual meeting.

Calls for 'Tobin tax'

Oxfam, which has been pushing for a flat tax on currency transactions, welcomed the IMF's plan to look at the issue even though cold water was poured on the idea of a Tobin tax.

"Strauss-Kahn said that it was fair to expect the banks to pay for clearing up the mess they've created," Max Lawson, international policy adviser at Oxfam, told The Associated Press. "A financial transaction tax is the only way to do it."

Lawson said a 0.005 per cent tax on currency transactions in major economies could raise $30 billion a year and that any rescue package for countries should include such a tax.

In his remarks, Strauss-Kahn again warned against the dangers of premature withdrawal of fiscal stimulus from the world's central banks.

And he warned that export-dependent countries need to focus on domestic demand as United States consumers show signs of eschewing their spendthrift ways and begin to pad savings.

The fund also mused Friday about increased funding to assist poorer countries — the "innocent victims of the crisis" — in the battle against climate change.