The G20 meetings look to be a barnburner:
Ottawa rejects IMF bank tax recommendation, shows flavour of summit to come:
[W]hile Ottawa supported the process to ask for the IMF study, the government is rejecting the results – in stronger language than ever.
"We believe that Canadian taxpayers should not bear the costs of bailouts of financial institutions in other countries," Flaherty told a Toronto financial conference, a day before heading to Washington to make the same argument to his international colleagues.
I can't see why Flaherty should back down.
We should probably start by dispensing with arguments to the effect that "Banks are bad, so we must tax them." This is, as the saying goes, not even wrong. Even if your hatred for banks burns with a pure, hard flame, you will never be able to force a bank to pay the tax – because banks are not people. Indeed, Canadian banks are an excellent example of the standard story of the incidence of corporate taxes. There cannot be a sentient Canadian who doubts the ability of our banks to push costs off to their workers and customers. Banks wouldn't be paying the tax; we would.
And for what? The idea seems to be to create some sort of global fund to pay for bailouts in the event of a future financial crisis. A bank bailout insurance policy for governments, if you will. Is this a good idea for Canada? At first glance, the case for participating seems weak: our banks just went through a pretty severe stress test without requiring a bailout.
The case doesn't get seem to get stronger when you look more closely. Stephen Williamson has a couple of very nice recent posts comparing the Canadian and US banking systems, here and here. One of the points he makes is that Canadian banks are "essentially self-insured" already – largely at the behest of Canadian regulators.
So what exactly would we be buying? It looks to me as though Flaherty's interpretation is the correct one: we'd be paying for bailouts of banks in other countries.
Stephen Williamson makes this comment:
Part of the conventional view of this historical experience is that there is something inherently wrong with banking – in converting illiquid assets into liquid liabilities banks leave themselves open to runs and panics. A Canadian perspective on this might be entirely different. A Canadian might look at US banking history and wonder why these Americans can never get it right.
There may be financial reforms that Canada should adopt in the light of recent experience. The bank tax doesn't seem to be one of them.
Worthwhile Canadian Initiative 
I am waiting blately for HuffingtonPost.com to put Flaherty’s picture up on their front page as the lastest and greatest obstacle to financial reform. Throughout this whole process of the G20 I have always suspected there was going to be a lot of friction between Canada, the US, and Europe. It is interesting that Obama is so eager to get his financial reform bill through Congress before things really get hot and heavy at the G20. I wonder if the process in Washington get dragged out the Republicans will start using Flaherty’s arguments against Obama. The really issue is that the US banking system has always been a political construct since the days of Andrew Jackson and neither party as much as they hate bailouts wants to trade the US system for the Canadian.
I guess Canada should hope we never get into a situation where we need international support for a domestic financial market bailout. Might not be a lot of help forthcoming (although with any luck, we’ll be considered too big to fail!)
Actually if Canada ever gets into trouble it will look more like Japan of the 1990s with banks long deposits vs the US circa 2008 short deposits. I am always stunned how much of TD’s balance looks like a Japanese bank huge cheap deposit financing against govt insured CMHC mortgages. John Hempton at Bronte Capital gives a pretty good overview of difference between Japanese banks and those in the US basically a bank that has strong liquidity and stable deposits can remain insolvent and operational for years ala 1990s Japan wherese as in the case Lehman and Bear even a solvent bank without liquidity fails immediately.
http://brontecapital.blogspot.com/2008/05/japanese-regional-banks-mirror-on.html
I have heard already that South Afica, Japan, India, Australia, and possibly Korea, China, and Russia are alligned with Flaherty which I think is a greater sign of shift in economic and political economic power in this century. My hunch is these other countries are much more nervous from a PR standpoint of seeming to gang together to unsurp the traditional leadership of the US, UK, France and Germany.
“We should probably start by dispensing with arguments to the effect that “Banks are bad, so we must tax them.” This is, as the saying goes, not even wrong. Even if your hatred for banks burns with a pure, hard flame, you will never be able to force a bank to pay the tax – because banks are not people. Indeed, Canadian banks are an excellent example of the standard story of the incidence of corporate taxes. There cannot be a sentient Canadian who doubts the ability of our banks to push costs off to their workers and customers. Banks wouldn’t be paying the tax; we would.”
If they start pushing the costs to workers and customers then tax them even more. Nothing like a 100% tax?
From a comment in the one link:
http://newmonetarism.blogspot.com/2010/04/big-banks.html
“asp said…
I cringe every time I read that Canadian Banks did not receive any help during the recent crisis. The PMO ordered CMHC to give them 60 billion dollars and receive a bunch of under water mortgages in return. And I wonder how dominant the five big names in banking are; here on the west coast there are two very large credit unions that seem to be as big as any of the east-central banks. If one added up all the credit unions in the country, would they total something significant to the economy?”
Kosta said…
“Asp: you’re right to point out that Canadian banks did receive support during the financial crisis. However, when I talk about the stability of the Canadian banking system, it’s a relative argument, where Canadian banks received much less support than other banks around the world (in addition to no Canadian banking and/or being bailed out by the gov’t).”
Is that correct?
It’s not the regular Banks that caused the crash, it’s the totally unregulated shadow banking system. That needs to change, there should not be unregulated bank-like entities able to take down an entire economy when they screw up.
PS: If the big 5 Canadian Banks are are so great, why did Harper order CMHC to give them 60 billion dollars? If they are self-insured, what did they need that money for?
The govt is already on the hook for the CMHC mortgages that were sitting on the banks balance sheet however the federal government could finance them at a much lower interest rate than the banks could thus reducing the overall mortgages across the banking system. Actually most of the mortgages CMHC bought(remember CMHC already insured them or would have for a new originations) from what I understand actually came from smaller banks and credit unions than the Big Six. Now I think the role of CMHC as a crown corporation is a legitimate discussion however other countries have similar govt agencies such as the rarely discussed and complete seperate from Fannie and Freddie, FHA and the Hong Kong Mortgage Office.
I should not that two credit unions in New Brunswick have recently failed. I know one on Deer Island was quite small however, the other Caisse Populaire de Shippagan has cost New Brunswick almost $40 Million in bailout money through both Conservative and Liberal governments. The Caisse happens to in poor but politically influential northeastern New Brunswick.
If the US and Europe hadn’t bailed out their banks, the ensuing global collapse would have greatly effected Canada. Why should Canada get to free-ride in the future?
If the big 5 Canadian Banks are are so great, why did Harper order CMHC to give them 60 billion dollars? If they are self-insured, what did they need that money for?
If you’re referring to the the IMPP, then you’ve misunderstood what it was. The IMPP was an exchange of assets, not a bailout.
If the US and Europe hadn’t bailed out their banks, the ensuing global collapse would have greatly effected Canada. Why should Canada get to free-ride in the future?
Instead of putting Canadian taxpayers on the hook for bailing out US and European banks, why not simply let the OSFI regulate them?
I second Stephen’s motion on the OSFI! Based on what I’ve read, when the OSFI says ‘jump!’, the only acceptable response is ‘how high?’. Can any bankers out there confirm/refute this? Are you appropriately afraid of your regulator?
Banks do have a pretty high profit margin in Canada. Would you assert that the size of one’s profit margin has no effect on the tendency to pass costs onto customers?
Also, if the banks can charge higher prices to no ill effect, why don’t they charge them now? Wouldn’t it make sense to charge what the market will bear?
Leo,
The ability to charge high prices is constrained by competition from other banks (and near banks). If one bank tried to increase its prices on its own, all else being equal, it would risk losing customers to its competitors. However, if you impose a tax on all banks (and presumably on other financial institutions), that’s an increase in costs that affects all of them more or less equally. In that case, a bank can reasonably figure that they can increase their prices (i.e., pass along costs to their clients) because all the other banks are going to do the same thing.
Asp,
Stephen is right, the IMPP wasn’t a bail out, at least not as anyone would understand the term. What it involved was the CHMC buying relatively illiquid assets (CHMC insured mortgages) from the banks for cash. Because those assets were already insured by CHMC the transfer didn’t involve CMHC taking on any more risk or reduce the risk held by the banks (since regardless of who held those mortgages, CHMC was on the hook if they failed), it just meant that the banks swtiched long-term assets for short-term ones. I might agree that was a bailout if you thought that CMHC paid more than fair market value for those mortgages, but I don’t think that they did (and if you do think that they paid too much the amount of the bailout wouldn’t be $60 billion, but the difference between $60 billion and whatever you think those mortgages were worth).
What Bob Smith said. Except that if CMHC does underprice its insurance, this should be regarded as an ongoing subsidy to mortgages (with the subsidy-incidence going all over the place) rather than a crisis-induced bailout of banks. I see the object being to try to get the banks to lend more, rather than prevent them going under.
While Flaherty’s opposition of the IMF bank tax is probbly correct from the narrow perspective of Canadian banking stability, I think he’s on the wrong side of wider perspective of this issue. There’s clearly a need for global mechanisms to foster banking stability. Canadian banks may have avoided the latest financial crisis, but Lehman’s collapse (and AIG’s near collapse) did have a global impact which affected Canada.
A global structure which improves financial stability, even if it does not directly improve Canadian financial stability, is a good thing. If Canadian regulations (bank taxes) already duplicate the intended role of the IMF tax, then why not implement the IMF tax and then scale back/modify Canadian regulations? Surely the benefit of having this additional global regulation outweighs the trouble of having to adapt Canadian regulation to fit it.
Of course the government overpaid for the mortgages via IMPP.
Does anyone really think the banking sector could offload $60 billion in illiquid MBS without cratering the market? Keep in mind that the CMB program bought another $50 billion or so at the same time that the IMPP was buying. That’s more than $100 billion traded over a year. There is no way that you can sell $100 billion without the other side of that trade punishing you by dropping its price, especially in the midst of a world financial crisis. The government stepped in as buyer of last resort so as to insure that the price would not be a bad one. That’s the subsidy. I bet these over-payments probably ran the taxpayer a cool $3-5 billion.
That being said, the IMF plan should be avoided at all costs. I’m betting that future Canadian bailouts will be paying for the mistakes of the public sector, not the private sector. Here in Canada it’s not the Royal Banks that are dangerous, its the CMHCs and CHTs.
I don’t think anyone is against the idea of a coordinated effort. But that doesn’t justify any coordinated effort.
Does anyone really think the banking sector could offload $60 billion in illiquid MBS without cratering the market?
Sure, but unless CMHC tries to dump it all at once, it’s unlikely to lose much – if any – money on the deal.
JP: But it’s the job of the Bank of Canada to provide liquidity. That’s its business. And it makes a profit by doing so. And the fact that others (like banks, ordinary firms, people) may also gain from the Bank’s provision of liquidity doesn’t make it a subsidy. The fact that it could have made even bigger profits (per unit of liquidity provided) by providing less (real) liquidity doesn’t make it a subsidy.
The fact that trade is mutually beneficial doesn’t mean either party to the trade is “subsidising” the other. It’s only when the trade is unprofitable to one party that it’s a subsidy.
What’s CHTs?
Loosening Canadian bank regulation and imposing bank taxs to go along to get along with some type of common EU-US standard I personally think is a big mistake. Remember all of the bank failures where in Europe or the US there weren’t any China, Japan, Australia or many other countries. I do think though what Flaherty is doing is perhaps one of the most significant actions Canadian foreign policy ever in such is that he organzing countries that are not “traditional” allies of Canada such as China, India, Russia, and Brazil against policy supported and deemed a matter of life and death to the politicians of many of Canadian traditional allies in 20th century making Pierre Trudeau’s antics in the 70s look like chicken feed all from government everyone always though disdained the developing world and was too close to the US and UK.
CHT is Canadian Housing Trust which is`the securization vehicle created by CMHC to securitize insured mortgages.
Thanks Tim.
From the linked story:
“The IMF was tasked by the G20 to analyze ways to make financial institutions pay for their own bailouts and rescue packages.”
What’s the deadweight loss of keeping a few tens of trillion tucked-away for bailing out the financial system? I have a hard time believing that constraining or forbidding financial activities that are equivalent to taking out insurance on your neighbours house and proceeding to burn it down (e.g. Goldman lawsuit, Magnetar) comes close to costing us that much. In some cases, it seems like a net benefit. After all, do we really want to give people incentives to go around burning down houses for fun and profit?
JP,
Fair point, but on that analysis the amount of the benefit to the banks was $3-5 billion, not $60 billion. Morever, as Stephen points out, it’s not clear that the IMPP will, at the end of the day, cost taxpayers a dime (making the case for a bank tax rather weak). In fact, because the mortgages the government was buying were paying more than the interest the government was paying to finance their purchases (they were eaning something like a 1% spread – I don’t have a link, but those were the numbers reported in the globe at the time), the government was making a nice little profit on the transaction. Those are the kind of “subsidies” I can live with.
Of course the CMHC will make money on the transaction if they hold it to maturity. But you guys are thinking in terms of absolute costs, and economics is about opportunity costs.
What alternative opportunities were given up when the government chose to overpay banks for CMHC MBS? Well, they lost the opportunity to buy other investments at market prices, and thereby forfeited the chance to earn a market return on their investment. They have opted for a sub-market return, and this cost is paid for by the taxpayer.
All that stuff about the government making money on their mortgages should be propaganda to the ears of an economist trained in the logic of opportunity cost.
“I don’t think anyone is against the idea of a coordinated effort.”
I don’t know if I’m against a coordinated effort, but I’m at best indifferent to it. Perhaps it’s because I’m a micro guy, I see the basic problem being one of moral hazard and I don’t see how any of this coordination reduces those hazards.
“What alternative opportunities were given up when the government chose to overpay banks for CMHC MBS? Well, they lost the opportunity to buy other investments at market prices”
The government isn’t forced to run a balanced budget, though. Why can’t it ‘overpay banks’ and buy those other investments?
To JP Koning:
Should we just eliminate CMHC altogether which I myself am open to. You could say that all of CMHC business lines regarding promotion of housing have an opportunity cost. CMHC has actually has had a mortgage purchase program for upwards of ten years now since Paul Martin was Finance minister. Basically during the financial crisis the upward ceiling of what they could purchase was raised by 60 Billion. In turn this gets to the governance of CMHC and who should decide its operations the dept of Finance?? and furthermore goes back to whether they should exist at all.
Another issue all together is that through this and other govt liquidity programs is the Department of Finance getting back into the business of monetary policy which since 1935 is supposed to be handled by the independent Bank of Canada. Close to a third of the current deficit is sitting in the govt’s BOC account(essentially making part of the deficit a wash against BOC govt bond holdings) largely rumoured because the market needed additional collateral in the form of new govt debt
But you can’t talk about opportunity cost without talking about risk (something economists should also be acutely aware of).
Yes, there are lots of other investments out there which may have earned higher returns (especially in the winter of 2008/2009), but they also would have entailed taking on some risk on the part of the government. In this case, because CMHC MBS are already backed by the government of Canada, they are indistinguishable from government bonds in terms of risk. So the opportunity cost of buying CMHC MBS is the interest rate the government could have earned on equally risky investments (i.e., government bonds), which at the time was less than the return on CMHC MBS (that’s oversimplifying, I’d have to look at the term of the MBS and compare those to the interest rates of comparable government bonds, but I suspect the ultimate conclusion is more or less the same).
Although there are other concerns that have been pointed out, doesn’t this also reduce the incentive to effectively regulate banks? Having a safety net makes sense when it works to allow people to take socially beneficial risks, or to protect against risks that aren’t easily eliminated. However, these risks are neither.
With regards to the IMF bank tax, I think there are three questions that need to be asked. First, wiill the bank tax promote financial stability in Canada at a reasonable cost? Second, will the bank tax promote global financial stability at a reasonabe cost? And third, if the answer is no to the first question but yes to the second question, then we need to ask if the befefits of a more stable global financial sector outweigh the costs of the tax to Canada?
I think that most agree that the IMF tax is probably a bad idea for Canada. The real question is whether the tax is a good idea globally?
To make an analogy, a resourceful educated professional might conclude that he’ll never need to use unemployment insurance. He could then argue that employment insurance premiums should be dropped because they are just a deadweight loss for him. But on a societal level, having employment insurance generates wide benefits that he partakes from, even if he never goes on unemployment himself. Should we follow his narow ine
(sorry my last comment got posted early) But basically, should Canada follow her narrow interests, or pursue a broader policy to promote global banking stability? Of course, this assumes that the IMF bank tax will promote stability globally, but that’s the question we should be asking.
Imposing a bank tax on all countries, regardless of their history of bailouts is akin to imposing on everyone the requirement to have healthcare insurance. This socialization lowers the penalty for those who are most likely to use it, and imposes a cost on those who would otherwise have maintained healthy lifestyles.
An unintended consequence of the global bank tax is to standardize bank behaviour at the lowest common denominator. In other words, banks all over the world may begin to take on more risk, knowing that there is a global bailout kitty for them if they fail. This is the only way they can recoup some of the benefits from the costs they are contributing towards this global bailout fund.
“An unintended consequence of the global bank tax is to standardize bank behaviour at the lowest common denominator. In other words, banks all over the world may begin to take on more risk, knowing that there is a global bailout kitty for them if they fail.”
This is certainly a concern I have. In that sense, I guess I am against a coordinated effort!
If I were running a very small country, I would be very tempted to do the following: support a global bank tax, and then encourage my country’s banks to take some very big risky bets (get my regulators to turn a very blind eye). Heads I win; tails the rest of the world will bail us out.
“The government isn’t forced to run a balanced budget, though. Why can’t it ‘overpay banks’ and buy those other investments?”
Sure, but the program was sold to the Canadian public as a money making trade, whereas it was nothing more than a bad investment. Why lie to people? They should just tell people straight up that they’re subsidizing the banking and housing sector.
Tim, I agree that the CMHC should go. Australia and New Zealand do fine without a government run housing body. And you’re right – why is the Department of Finance providing liquid funds to banks, isn’t this the BoC’s job?
I bought it as a liquidity-producing move, in a market where a lack of liquidity was becoming a serious problem. The fact that it will – eventually – make money for the CMHC/govt was secondary.
JP, I don’t get why you characterize the purchase of MBS as a bad investment. The government bought government guaranteed debt paying a return greater than the government backed debt it issued to buy it. In any world that’s a good investment.
And on further reflection, I’m not sure I buy your overpayment analysis. Yes, had the banks sought to dump $50 billion worth of MBS on the market the price of those securities would have fallen. But the banks weren’t going to do that, they’d just hold on to whatever cash they had and stop lending. So the government didn’t “overpay” for MBS, because there wasn’t (and wasn’t going to be) an opportunity for it to buy those securities at at lower price.
It was the second point on their list, but I don’t think it was secondary.
From my perspective, they tried to spin the IMPP as a perfect plan, a way to achieve some result at no cost whatsoever to the public. My point is only that they overpaid, thereby foregoing the opportunity to get a market return, and voila the cost to the public.
Bob: Alternatively they could have not paid the $60B, kept the subsidy, and retained it as capital to cover future MBS guarantees, thereby lowering net risk.
“If I were running a very small country, I would be very tempted to do the following: support a global bank tax, and then encourage my country’s banks to take some very big risky bets (get my regulators to turn a very blind eye). Heads I win; tails the rest of the world will bail us out.”
Agreed. If I was, say, the President of Romania, I’d do exactly this.
There’s lots of people out there who know that CMHC subsidizes mortgages. Myself, I haven’t seen any serious study of the question. (I’m serious….if you know of a good study that tries to estimate the size of subsidy, please mention it.)
When it comes to mortgage default insurance, I’m also uncertain about whether this is “subsidized.” I know that CMHC competes in the market for mortgage default insurance with a private firm (Genworth) who, as far as I know, make profits. That’s not what I expect when something is heavily subsidized.
How should we think about this?
rogue – I like your health care analogy. But you know, it is in the interest of everyone, including those who are healthy, to ensure that the less than healthy have health care insurance, because when people get sick, it’s a drag on society as productive individuals can no longer work, produce and consume. Similarly, a globally enforced bank tax could prove beneficial if it increases financial stability and decreases the fallout the next time there is a crisis, even if it only works by ensuring there’s enough money available to bail out the next Lehman’s.
On the other hand, I think you’re right (as are Mike and Nick) about the potential for some very bad unintended consequences of the plan. It could very well encourage bad behaviour. But I still think it’s worth looking in to as the benfit of increased financial stability could outweigh the potential moral hazard (especially if the moral hazard could be mitigated (maybe a clause transferring ownership to non-domestic sources in bailout situations?))
JP,
How does holding onto the $60 billion reduce their net risk? That doesn’t make any sense. Let’s think of the two scenarios. In your scenario, the government has an asset worth $60 billion (cash) and some unknown future liability equal to X (i.e., the amount of the guarantee that the government is required to satisfy). In my scenario, the government has an asset worth $60 billion at maturity (because it’s guaranteed by the government)and a liability equal to X (i.e., the amount of the guarantee that the government is required to satisfy). So how is one scenario riskier than the other?
In your scenario the government should retain the $60 bilion to cover its future MBS guarantees. In my scenario has covered its future MBS guarantees because those guarantees are owing to itself.
What the government did do is convert a liquid asset (cash) into a (then) illiquid asset (MBS). If the government were a private party (or Greece or Portugal), that would definitely involve the assumption of some liquidity risk, but query whether that’s a meaningful risk for a government with the capacity to print its own money (for whom liquidity is, I would have though, not a huge concern).
One interesting thing I just read is that this IMF proposal is actually based off of a tax charged by the Quebec government on financial institutions in the province. I have to admit to not having a lot of knowledge of the tax system in Quebec and curious if any the Quebecers(Stephen??) on the blog have any knowledge of this tax. My understanding is that the revenues go into the general fund not to anytype of systemic insurance and it is seen as a way compensating for the fact that financial institutions do not pay much in GST/QST tax. While I think Flaherty is well known in his desire to shift tax points to the provinces and thus is that hypocritical in opposing this this is now the second time that Conservatives are against the imposition of a type of tax at the Federal level that the at least nominal provincial allies are in favor at the provincial level(BC and Quebec Carbon and now Quebec FAT)
There is actually a seperate deposit insurance fund in Quebec from the CDIC which covers Desjardins but my understanding is the tax covers all institutions including those covered by CDIC insurance.
The CTV political show Power Play had former Dept of Finance economists Andrew Sharpe and Don Drummond on today to speak about Carney’s often repeated criticism of the lack of productivity improvements in Canada despite low taxes and exceptionally profitable sectors over the past decade. Canadian companies are just not investing in equipment. So, in the case of these protected banks, where are the profits going (I’d argue mostly to shareholders)?
I see Bob arguing earlier (seconded by Nick and the basis of Stephen’s blog) that any increase in corporate taxes theoretically gets passed onto employees and customers in a highly competitive world. So, what does theory tell you will happen in an industry protected from competition? Because that is how the chief economist of the TD bank describes the Canadian banking sector (see clip above at 6:15).
Doesn’t this lack of int’l competition for Canadian banks provide Flaherty more latitude in going it alone?
Kosta: “if the moral hazard could be mitigated (maybe a clause transferring ownership to non-domestic sources in bailout situations?)”
In theory this could work. But by the time an insolvent bank takes the fall, insiders will have scuttled it of any value. Which non-domestic source will want to take it over? That’s the benefit of having insurance, you can get all the gains from destroying something, while somebody else is left holding the liabilities. This is the psychology having a global bailout fund will engender. Everybody will start thinking like American bankers.
Taking off from the healthcare analogy, preventive monitoring and health maintenance always trumps having a comprehensive insurance coverage, at least in as far as ensuring people are not being careless about their health. I think the same is true with banks.
Just,
I think what I said (correctly) was that in a competitive economy, corporation’s COULDN’T pass along country-specific cost increases (such as a tax increase) on to consumers (because consumers can purchase their products at the world price) and so they end up being borne by labour (and not capital – because capital too is supplied on the world market, whereas labour isn’t).
In a protected market, where consumers can’t purchase those goods or services from foreign corporations, those costs can be passed along to labour and/or consumers (which would probably be most people’s experience with Canadian banks).
Ok, my apologies if I misread what you wrote.
However, wrt to your most recent paragraph, if the markets were indeed protected, ie an ideal oligopoly, to maximize profits, wouldn’t banks already charge the maximum amount to consumers and pay the least to labour as neither had access to innovative (and cheaper)foreign competition?
So, any tax increase has to come out of the bank’s profits. Otherwise, they wouldn’t have previously been maximizing profits as they were leaving some money on the table.
Just,
What you’re assuming is that the tax increase doesn’t have any impact on other markets other than banks. That’s clearly not correct in the context of a corporate income tax increase, since it would likely drive down the demand, and ultimately the price, for labour, in the broader economy as a whole (as corporations, generally, look to pass on those costs to workers).
Now, where you have an interesting argument is what happens when you have a tax only on banks. I think you’d have a pretty compelling argument that banks couldn’t pass on a tax on banks alone to labour, because they have to compete with other employers (who aren’t subject to that tax) in the Canadian labour market (and the banks, big as they are, likely aren’t big enough to be price setters in that market).
But they’d still be able to pass along the cost of such a tax to their consumers. Remember, firms seek to maximize profits given their costs. You change those costs, you’ll likely change the profit maximizing price. In the case of banks, even in an oligopoly, they compete (imperfectly) with one another. So, in the absence of a tax, their ability to increase prices is constrained by that competition. But, if you increase the costs for all banks, they’ll likely all increase their prices, knowing that the others won’t try to undercut them because they’re all facing the same cost increases. Saying that, after a tax increase prices will rise, doesn’t mean that the firms weren’t profit maximizing before the tax increase. It means they were profit maximizing given the circumstances of the industry. Change those circumstances, and the profit maximizing price will change too.
Look, let’s think of it in another context: Coffee. Now, are we under any illusion that Starbucks, Timmies, Second cup, etc. are profit maximizing firms? That’s obvious. Now, let’s suppose that there’s an exogenous increase in their costs. It could be that the price of coffee beans goes up because of a poor harvest. Or maybe the government decides to impose a coffee tax, it doesn’t really matter. Now, notwithstanding that you can’t throw a rock without hitting a Timmies in this country, the coffee sector is a price taker in the labour market, so they can’t pass along their increased costs to their workers, they can’t pass them along to owners of capital, so they’re going to pass those costs along to their consumers. And it’s hardly a controversial suggestion that when the costs of selling coffee go up, the price of a cup of coffee will go up with it.