President Barack Obama’s proposal to charge big banks a fee to repay a taxpayer bailout for the financial system may create incentives that result in funding concerns for banks, according to one expert.
The proposed 0.15% fee on certain bank liabilities could incentivize banks to seek funds by increasing their fee-exempt FDIC-insured deposit base, according to Anthony Marciano, a corporate finance professor at New York University.
With interests at record lows today, this may cause problems in asset liability management when the Fed eventually raises short term interest rates, he notes.
“This increases the risk of asset liability mismatch,” Marciano notes. “Banks borrow short and lend long, which creates interest rate risk. If Wall Street’s funding is increasingly dependent upon short-term interest rates, exiting the current state of massive liquidity may become more complicated for the Federal Reserve.”
“Obama’s proposed bank fee is broad legislation that seeks to achieve several economic and political objectives at once. Such proposals may have unintended effect of distorting incentives,” Marciano said.
On Tuesday, Philadelphia Federal Reserve President Charles Plosser emphasized the Fed’s need to normalize monetary policy and raise interest rates in a timely fashion if concerns about future possible inflation arise. He emphasized the need for an exit strategy to keep inflation from reaching an unacceptable level.
He warned that in the 1970s, “the U.S. had some of the highest inflation rates in the post-World War II era while we also had high rates of unemployment and low resource utilization”.
Plosser considers an appropriate exit solution as one of the toughest challenges for the Fed. The new bank fee may further complicate this situation.