Banks Consider Ways to Avoid Proposed Fees

Bankers already may be looking for ways to not pay a new fee proposed by President Obama.

The fee on large banks was announced as a way to raise up to $117 billion to repay taxpayers for the losses blamed on recipients of the $700 billion bailout funds. The amount of fees charged to the banks would be based on how large their liabilities are excluding liabilities from deposits guaranteed by the Federal Deposit Insurance Corp.

Nothing is definite because the proposal still needs to make its way through Congress. But just the announcement was enough to prompt some bankers, lawyers and consultants to think of ways to avoid having to pay any fee.

Administration officials have their fingers crossed the fee will provide institutions with the incentive to reduce their overgrown balance sheets and cause some to even get rid of assets. However, the president knows some already are thinking of ways to avoid paying the fee or reducing their assets.

“Instead of sending a phalanx of lobbyists to fight this proposal, or employing an army of lawyers and accountants to help evade the fee, I suggest you might want to consider simply meeting your responsibilities,” he said.

Nonetheless, there are possible options. One is known as securitization. In that method, banks sell their loans to a trust or outside organization with funds not appearing on their balance sheets. In turn, the entity then would finance the loans.

There already are government accountants exploring ways to make it tougher for the institutions to move their assets into alternative financing methods. The results would be new ways to close the loopholes associated with these kinds of entities, but there still are no promises they actually will be successful in their quest.

Banks also might opt to shift more funds into brokered deposits. In this method, the deposits are channeled through private bankers or retail brokers. The benefit to the banks would be those types of deposits would not liable for fees.

The downside would be an impact on smaller banks that rely on deposit funding. Thousands of them could be edged out while large institutions go after the cash.

And still another method would seem to be déjà vu with Wall Street playing a key role. In this scenario, new securities would be created and they could be considered preferred equity. In practice, they would be more similar to debt.

There could be other methods that arise to help the institutions avoid paying the taxman. This is almost a certainty because banks already have staff whose main purpose is helping their employers and customers pay the least tax possible.