Geithner: Banks should bear bailout burden

NEW YORK (CNNMoney.com) -- Treasury Secretary Tim Geithner told lawmakers Tuesday that a proposed bank fee could help stabilize the financial system and recoup bailout costs by targeting banks that engage in more risky behavior.

In testimony before the Senate Finance Committee, Geithner said the Financial Crisis Responsibility Fee, proposed by President Obama in January, could raise about $90 billion over 10 years.

The goal of the fee, he said, "is to make sure that the direct costs of TARP are paid for by the major financial institutions, not by the taxpayer."

Geithner said the fee would impact banks that have over $50 billion in assets and were eligible for emergency assistance programs, such as the Troubled Asset Relief Program, or TARP, during the financial crisis of 2008. He said over 99% of banks would be excluded from the paying the assessment.

Under the proposal, banks that take more risk would be charged more than banks that are managed more conservatively.

"This framework has the significant benefit of including derivatives and off-balance sheet items not otherwise reflected under conventional accounting," Geithner said. "In this way, the fee targets, and thereby would help discourage, activities that pose the most risk to the stability of the financial system.

However, Geithner stressed that the fee is not a substitute for more comprehensive financial reform proposals being debated in Congress. Among the new regulations under consideration are higher capital and reserve requirements for banks, and giving regulators the power to shut down big banks that pose a risk to the overall economy.

The committee also heard testimony from representatives of the American Bankers Association (ABA) and the Financial Services Roundtable, among others, who oppose the fee.

"The implications of this tax do not stop with the largest banks," said James Chessen, chief economist at the ABA, in prepared remarks. "In fact, the costs and consequences will ripple through the financial services system, imposing costs on all banks and their customers."

The banking industry says the proposed fee unfairly applies to institutions that did not take TARP money and could put U.S. banks at a disadvantage to overseas rivals. Critics also say the fee will hurt small businesses by raising the cost of lending across the industry.

Supporters argue that the fee only applies to the nation's largest financial institutions, while smaller banks that provide the bulk of small business lending are exempt. In addition, proponents say banks that try to pass the fee on to customers will lose business to smaller rivals, which will boost small business lending.

Opponents also say the fee excludes some major TARP recipients, including the government-sponsored lenders Fannie Mae and Freddie Mac, and automakers General Motors and Chrysler.

Geithner said he expects the government to recoup "a substantial fraction" of the money allocated to American International Group (AIG, Fortune 500) and the automakers, which he said are going through "wrenching" restructuring. But he stopped short of saying the fee should apply to Fannie and Freddie, given the still weak housing market.

He said the Treasury Department is working with finance officials in Europe and the United Kingdom to "ensure a level playing field," adding that his international counterparts are considering a similar fee.