Friday, June 17, 2011

President’s FY 2012 Budget Includes a Financial Crisis Responsibility Fee for Financial Firms

The President’s FY 2012 budget would impose an annual financial crisis responsibility fee based on liabilities of U.S.-based bank holding companies, broker-dealers, and companies that control broker-dealers and insured depository institutions. A principal rationale for the financial crisis responsibility fee is that it would provide a deterrent against excessive, and potentially risky, leverage and assets for the largest firms. The proposed rate has not been determined, but is expected to be approximately 0.075 percent of an applicable financial firm’s covered liabilities. An unspecified discount applies to certain sources of funding considered more stable, including long-term liabilities.

The fee would only apply to firms with worldwide consolidated assets of $50 billion or more. Firms with worldwide consolidated assets of less than $50 billion would not be subject to the fee for the period when their assets are below the threshold. United States subsidiaries of foreign firms that fall into these categories and that have assets of $50 billion or more also would be subject to the fee.

The universe of financial institutions subject to the proposed financial crisis responsibility fee is not entirely clear from the proposal. For example, the proposal applies to “certain brokerdealers” and companies that control “certain broker-dealers” but does not specify criteria for inclusion or exclusion. Treasury Secretary Geithner noted in testimony before the Senate Finance Committee on May 4, 2010, that the reference to broker-dealers was meant to refer to primary dealers eligible for the Federal Reserve’s primary dealer facility

Another ambiguity is presented by the $50 billion worldwide consolidated asset threshold. The fee applies to U.S.-based firms with $50 billion or more in worldwide consolidated assets. It is not clear what is intended by “consolidated.” The meaning of, and requirements for, consolidation differs in the financial reporting and U.S. federal income tax contexts. In addition, there is potential for technical difficulty in measuring the worldwide assets of a foreign-based firm that may not otherwise be subject, or is subject only to a limited extent, to U.S. GAAP. The proposal can be read to mean that the relevant amount is what is actually reported to the appropriate Federal or State regulators. However, the proposal can also be read to suggest such reported amounts are a non-controlling guide.

Similarly, application of the threshold is not clear in the case of foreign-based institutions. There are at least three options for a group with a foreign-based parent. First, the threshold would apply on a worldwide consolidated basis regardless of whether the ultimate parent entity is U.S. or foreign-based. Second, the consolidated assets of all U.S.-parented groups under an ultimate foreign parent are aggregated. Third, the threshold would apply to each U.S.-parented group’s assets on a stand-alone basis. According to a Joint Committee on Taxation report, the best reading of the proposal may be the third and narrowest option since the proposal specifically looks to the assets of U.S. subsidiaries and not the consolidated or aggregate consolidated assets of such subsidiaries.

No comments: