How Taxing Will Bank Taxes Be?

Just in case bad loans, pay packages, mark-to-market, and high unemployment don't pose enough risks to bank earnings, the president has proposed a new fee on banks. The proposal has generated lots of policy debate, but what would that fee mean to the banks' bottom lines?

The White House fact sheet describing the proposed fee leads off with:

Today, the President announced his intention to propose a Financial Crisis Responsibility Fee that would require the largest and most highly levered Wall Street firms to pay back taxpayers for the extraordinary assistance provided so that the TARP program does not add to the deficit.

The new fee would go into effect June 30, would apply to financial firms with more than $50 billion in assets, and is expected to raise $90 billion over 10 years, and the full projected $117 billion of TARP losses over 12 years. The vast majority of the nation's banks fall below the asset cutoff, but the Federal Reserve's National Information Center lists 35 banks with more than $50 billion in assets.

The annual fee would be 0.15% of covered liabilities. What the heck are covered liabilities, you ask? Covered liabilities are defined as: Assets minus Tier 1 Capital minus FDIC insured deposits and insurance policy reserves. 

Company

Assets

Tier 1 Capital

FDIC Insured Deposits

Covered Liabilities

Annual Fee

Bank of America (NYSE: BAC  )

$2,252,814

$193,089

$909,527

$1,150,198

$1,725

JPMorgan Chase (NYSE: JPM  )

$2,041,009

$126,541

$621,364

$1,293,104

$1,940

Citigroup (NYSE: C  )

$1,888,599

$126,285

$327,616

$1,434,698

$2,152

Wells Fargo
(NYSE: WFC  )

$1,228,625

$108,785

$734,563

$385,277

$578

Goldman Sachs (NYSE: GS  )

$882,586

$59,461

$35,619

$787,506

$1,181

Morgan Stanley (NYSE: MS  )

$769,503

$45,962

$56,311

$667,230

$1,001

US Bancorp (NYSE: USB  )

$265,058

$21,990

$154,798

$88,270

$132

Suntrust

$172,814

$18,214

$118,762

$35,838

$54

All figures in millions. Data as of Sept. 30, 2009. Data sources http://www.fdic.gov/ and http://www.ffiec.gov/.

These calculations are based on values reported before Citigroup and Bank of America repaid TARP, but the repayments won't make much of a dent in more than $1 trillion of covered liabilities. A new fee totaling more than $2 billion per year for Citigroup is a big stack of cash, especially for a bank that's reporting losses. A $400 million fee every quarter won't do much to stem the losses at Bank of America either.

This doesn't necessarily mean it's time for investors to sell all their bank stocks or scramble to buy puts. The proposal will almost certainly see changes as it works through Congress. Banks would have incentives at the margins to bump up interest rates on deposits and take other measures to reduce their covered liabilities. However, it is time (as always) to pay attention to new proposals coming out of Washington and what they might do to company earnings and cash flows.

More on TBTF Banks:

Fool contributor Russ Krull owns shares of Wells Fargo, but no other company mentioned in this article. The Fool has a disclosure policy that is a definite asset, but is not FDIC insured.


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