President Obama’s proposed Financial Crisis Responsibility Fee would be levied against the debts of financial firms with over $50 billion in consolidated assets. It seeks to recoup over the next 12 years TARP’s projected cost of $117 billion. The fee, aimed at institutions whose risk-taking precipitated the financial crisis, also seeks to discourage excessive leverage.

The proposed tax is 15 basis points of covered liabilities per year, with liabilities defined as: Covered Liabilities = Assets – Tier 1 Capital – FDIC-assessed deposits (and/or insurance policy reserves, as appropriate). This would equal a $1.5 million tax for every $1 billion in covered liabilities.

The proposed tax may yield unintended consequences. While small banks and community banks are exempt, it could drive up funding costs for banks that rely more heavily on deposits for liquidity. Large banks could blunt the tax by increasing deposits through paying more interest. Smaller banks would have to match. Large banks could also cut back on advances from the Federal Home Loan banks. Building equity is another way to reduce the impact.