One of our favorite jam's around GTW this fall has been country artist John Rich's tune "Shuttin Detroit Down." Few songs capture better the anger that many in this country feel against the bankers that ruined the economy by infecting all sorts of institutions with toxic assets, and then going on to "take their bonus pay and jet on out of town."
But one issue that hasn't gotten a lot of attention is how our bank bailouts constitute subsidies that can be disciplined by the World Trade Organization.
The Scheduling Guidelines to the General Agreement on Trade in Services (one of 17 WTO agreements) state that the national treatment obligation “applies to subsidy-type measures in the same way that it applies to all other measures." This obligation targets policies that modify "the conditions of competition" in a way that - even inadvertently - favors domestic service providers.
There's been some uncertainty in policy circles as to how much bank bailouts might be carved out the subsidy obligations. Are these even subsidies, or are they just special programs for a special sector?
Looking back on over a decade of writing by the WTO Secretariat, it's pretty clear that - not only are bank bailouts considered subsidies - but they are some of the most frequent GATS-relevant subsidies. The WTO's Working Party on GATS Rules, over a set of five biannual reports, have targeted the following policies:
In 1998, the financial sector was the most frequently subsidized (14 countries):
- Mauritius: Offshore banks don't have to pay taxes or comply with certain regulatory requirements.
- Uganda: Foreign banks eligible for tax holidays, duty drawbacks and free transfer of funds.
- Brazil: BNDES national development bank holds assets in private banks.
- Morocco: Offshore banks exempt from registration fees, stamp duties on official documents, VAT on capital goods and equipment, import duties and other taxes on equipment, movable property, and capital goods, charges on dividends to shareholders, charges on interest on customer deposits and investments, and charges on interest on loans.
- New Zealand: direct government provision of life insurance.
- Norway: Following 1991 financial crisis, Government Bank Insurance Fund injects equity into three largest commercial banks.
- Venezuela: Nationalization of banks following 1994 crisis.
- Cyprus: Offshore banks subject to low or no taxation.
- France: Government injected money into newly privatized companies and Credit Lyonnais, angering private competition.
- Malaysia: tax reductions and exemptions for insurance firms with local ownership.
- Mexico: Recapitalization of banking sector following Peso crisis, debt relief to small debtors through interest rate subsidies and mortgage and commercial restructuring.
- Paraguay: Central bank intervened in several banks and financial institutions to take over management, provide financial assistance, defer interest payments, launch tax holidays, use social security funds to repay depositors.
In 2000 (I'll just feature new items from here on down):
- Jamaica: tax relief for offshore banks.
- Trinidad: tax incentives to develop banks in depressed regions.
- Uruguay: no duties on financial information processing in free trade zones.
- Indonesia: deposit guarantees for locally incorporated commercial banks.
- Hong Kong: Government bought shares in publicly traded banks to stabilize prices.
- Canada: real estate finance sector eligible for tax incentives.
- US: Tax deductions for small insurance companies, favorable tax treatment for excess bad debt reserves at banks.
- Thailand: Government debt-equity swaps for four banks after financial crisis. Recapitalization policies are also targeted, as are tax and stamp duty incentives for offshore banks.
- Tanzania: Tax holidays and capital allowance deductions for commercial, development and micro-finance banks.
- Singapore: Offshore banks enjoy concessional taxes on profits, and are not subject to reserve and liquidity requirements. Fund managers get tax holiday on fee income if they manage certain investments. Trustee companies face low to no tax. Double deduction for financial institutions that conduct R & D in country. Other benefits for arranging, underwriting, and distributing bonds, syndicated credit, foreign exchange operations, credit rating agencies and more.
- Poland: banking sector receives grants, loans and tax incentive to encourage cooperative banks to restructure and to establish regional banks.
- Germany: state guarantees for landesbanks.
- Korea: Bad loans purchased from banks.
- Brazil: restructuring costs covered for private banks assisting in privatization of public banks. Also, taxes on insurance in agriculture and mortgages and other sectors was reduced to zero.
- Switzerland: cantonal tax incentives are available.
- Ghana: investments in rural banks and enterprises get favorable tax treatment.
- Macau: Offshore banks enjoy regulatory and tax benefits. While they are usually not allowed to grant credit to residents, the government can exempt them from this requirement if it's in sectors in which the government wants to increase investment.
- Costa Rica: state banks have deposit insurance, while private banks do not.
- Brunei: banks have gotten assistance from the government.
- Dominica: offshore insurance firms receive various tax and regulatory benefits.
- St. Kitt and Nevis: offshore trusts receive tax and regulatory benefits.
- Saint Lucia: free zones for financial services.
- St. Vincent and the Grenadines: planned free zones for financial services.
- Czech Republic: loans, liquidity and restructuring assistance to small banks.
- Slovak Republic: equity infusion, carve-out of bad assets into loans and then state bonds, for newly privatized banks.
- Malaysia: tax incentives to aid to consolidation in the domestic banking sector.
- Mexico: government intervention in two domestic banks wiped out private shareholders.
- India: capital infusions into public banks, plus income deductions for bad loans.
- Barbados: Incentives for capital allowances, dividend taxation and loss carry-forwards for offshore banks, trusts, insurance and other financial companies.
- Australia: development allowance, offshore banking incentives, infrastructure borrowing tax offset scheme, export market development grants scheme, R & D start program, innovation investment fund, R & D tax concession for financial institutions.
- Indonesia: active government involvement in managing mergers.
- Turkey: public sector capital infusions conditioned on lending requirements.
- US: government sponsored enterprises like Fanny Mae and Sallie Mae can include exemption from state and local taxation, and access to a back-up Treasury credit line. GSE debt can be used as collateral for public deposits, for unlimited investment for banks and thrifts, and for Fed purchase in open market operations. GSE debt obligations are treated as government securities for some regulatory purposes.
- Rwanda: state owns stakes in many private sector banks, and tax exemptions are granted to UBPR for its role in poverty alleviation.
- Singapore: tax incentives for venture capital funds.
- Korea: government guarantees losses and injects capital into public industrial banks.
- Guinea: incentives for investment banks.
- Bolivia: tax incentives for the financial sector.
- China: government purchases of non-performing loans from state banks, use of foreign exchange reserves to prepare banks for listing on stock exchanges.
- Kyrgyz Republic: Insurance companies get a concessional income tax rate of 5% of total premiums, in order to develop domestic insurance market.
- East African Community: VAT exemptions for financial sector.
- Argentina: policies to help peso-ize deposits, freezing and unfreezing of deposits based on trade and other priority sectors.
You'll note that some of these subsidies and bailouts don't necessarily discriminate against foreign firms - some, quite the opposite. But the list gives you a sense of the kind of domestic policies that the WTO concerns itself with.