IMF Studies How to Pay for Financial Sector Rescues

IMF First Deputy Managing Director John Lipsky leads the Fund group tasked with preparing the report.

In this interview, Lipsky explains how the IMF will go about its work as it studies various approaches. The final report will be presented to the G-20 Leaders next June, with a preliminary version to be discussed at the G-20 Finance Ministers meeting in April.

IMF Survey online: There’s a lot of interest in the work that the Fund is doing on taxation of the financial sector. What exactly is this about?

First of all, I want to be clear about the subject and scope of our report. We are responding to the G-20 Leaders’ request for an analysis of the various ways in which the financial sector could help to defray the costs of public sector crisis support. Since you mentioned "taxation," I would stress that while this may provide a convenient shorthand reference for the project, our report will encompass other possible funding sources, including some that resemble user fees.

Although we will focus principally on the funding challenges posed by potential future crises, we also will examine the efforts underway to recoup the cost of the current crisis. Of course, there are many links between these two, but the analytical approach-and the appropriate policy choices-inevitably will differ in each case.

At the same time, our study will examine which institutions and/or activities should be included, and in the case of future crises, whether a fund should be created in advance of any prospective use. In analyzing the various policy options, important considerations will include bolstering systemic efficiency and effectiveness, including by removing existing distortions and by avoiding the introduction of new ones.

IMF Survey online: What do you see as the main challenges for this work?

At its heart, our analysis will address how to fund the direct financial sector support that could be required in a potential financial crisis. Assessing this need will require analysis of the spillover effects-that is, externalities-that financial sector activities pose for the rest of the economy. At an analytical level, the burdens resulting from financial crises can be addressed through taxation, or regulation, or a mix of the two. Thus, a key question that our analysis will have to confront is the appropriate balance between these two basic policy options.

For example, a more tightly regulated financial system presumably would be more stable, and therefore would...