Battle Brews over User-Fee Proposal
Kerry Would Tax Fund Transfers to Pay for Bailouts
Wholesale bankers and their corporate customers are spoiling for a fight over a proposal in Congress to make them pay for the thrift bailout and for the problems of the Bank Insurance Fund.
The proposal, overshadowed by other banking legislation when it was floated earlier this year, would impose a "user fee" on interbank corporate payments, such as those that flow over the Fed Wire or Chips.
Pushed by Sen. John Kerry of Massachusetts, the idea is likely to surface in coming days during debates over the bank reform bill or funding for the Resolution Trust Corp.
Sen. Kerry, a prominent Democratic critic of Bush administration policies and a member of the banking committee, sees a user fee as a way to make corporate interests finance a "pay as you go" thrift bailout.
The wholesale electronic banking community denounces the idea as an unfair tax that will cost banks and the entire economy even more than the proposed fee of 0.02% of each funds transfer, or $200 on a typical $1 million transaction.
While the mechanics of collecting the fee still have to be explained, one estimate places its annual revenue-generating potential at $85 billion - $5 billion more than the RTC is seeking to complete its work.
Executives of electronic funds transfer networks, which rely on high technology to clear and settle hundreds of billions of dollars a day, warn that any such "tax" would be stifling.
"If the Chips system was ever mandated to collect such a tax, there wouldn't be a Chips system," said John Lee, president of the New York Clearing House Association, which operates that system.
"This measure would cost businesses anywhere between $60,000 a year for a small company to $20 million a year for oil companies," said Frank Curran, a spokesman for the Treasury Management Association.
The Federal Reserve System and commercial banks already charge fees to customers that transfer money over the large-dollar-volume networks.
Sen. Kerry first proposed augmenting those fees early this year as an amendment to the bank reform package. He would use the proceeds of the user fee to establish a fund in the Treasury Department for resolving failed savings and loans and beefing up the Bank Insurance Fund, as needed.
The user fee would apply to paper and electronic clearance transactions, book-entry securities settlements, and most other corporate payments over the Fed Wire, Chips, and probably the automated clearing houses.
Easing Taxpayer Burden
Jonathan Winer, counsel to Sen. Kerry, said the lawmaker sees the proposal as a "pay as you go" solution to the S&L bailout and a fairer method of funding.
"Nobody wants to pay for these bailouts," said Mr. Winer. "Sen. Kerry believes the debts need to be paid off quickly by as broad a base of contributors as possible."
He said the fee would actually ease the burden to U.S. banks and taxpayers because half the revenues would be generated from abroad by foreign users of dollars. Many Chips transactions, for example, are related to international trade.
Sen. Kerry plans to introduce the amendment when funding for the RTC is voted on in the Senate, possibly this week.
He may also attempt to attach the amendment to the Senate version of the bank reform bill, which is scheduled for consideration by the banking committee this month.
Representatives of money transfer networks say the measure would be a burden to taxpayers because banks and corporations will pass higher costs on to consumers.
Flight to Foreign Banks
They also say that it will drive a lot of business offshore, as firms seek to avoid the fee by using foreign banks and payment systems whenever possible.
"If this legislation is approved, the payment system could go back to where it was in the 1950s, and make banks and corporations less competitive in the world markets," said Elliott C. McEntee, president of the National Automated Clearing House Association, Herndon, Va.
Ian Macoy, a government relations official at the American Bankers Association, said the group has been in touch with Sen. Kerry to protest.
PHOTO : John Lee Clearing house president