The International Monetary Fund is studying the possibility of imposing a tax on the financial sector to recover the cost of bailing it out.

In a speech delivered in Vancouver this week, IMF first deputy managing director, John Lipsky, indicated that both the public and financial market professionals “have been shocked by the scale and scope of public support that has been required to stabilize the financial system over the past two years”.

Looking ahead, he said, an obvious issue is who should bear the cost of crisis mitigation measures. “This is a complex and contentious issue, but despite the acceptance of the idea that deposit insurance is typically paid by a banking levy, this topic up to now has received surprisingly little systematic attention and analysis,” he said.

“In particular, there is an obvious trade-off between introducing more constraining regulation – that could limit prospective risks, but reduce the scope for the financial system to allocate capital – and creating mechanisms to compensate for the potential cost of risk mitigation,” he added.

Lipsky added its analysis of a possible tax will look at the idea in the context of having the financial sector contribute to the cost of the its’ bailout; whereas the often-referenced concept of a Tobin Tax was intended to suppress transactions, rather than raise revenue, and was targeted on foreign exchange transactions in particular.

“Our study will cover the issues and options broadly, taking into account both current practices and the available expertise. Included will be the knotty issues of how broadly to define the institutions and/or activities that would be affected, and whether a fund should be created in advance of any future use. Avoiding distortions and insuring systemic efficiency and effectiveness will be important considerations in evaluating the options, including a potential transactions tax, among other alternatives,” he said.