G-20 splits on trading tax, but insists banks must foot bill of future bailouts

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: Group of 20 governments signaled banks will be forced to cover a greater cost of future bailouts even as they split over whether that should be achieved by taxing financial trading. After spending more than $500 billion in taxpayer’s money to save banks from Royal Bank of Scotland Group Plc to Citigroup Inc, officials meeting in St Andrews, Scotland this weekend debated how the financial industry can be forced to pay for future rescues.

The specifics sparked division, with UK Prime Minister Gordon Brown’s call to consider a so-called Tobin tax immediately opposed by US Treasury Secretary Timothy Geithner. “It cannot be acceptable that the benefits of success in this sector are reaped by the few but the costs of its failure are borne by all of us,” Brown told finance ministers and central bankers at their Nov 7 talks. Geithner said “we want to make sure that we don’t put the taxpayer in a position of having to absorb the costs of a crisis in future.”

G-20 officials are narrowing their focus on reining in excessive risk-taking after uniting earlier this year to fight the worst financial crisis since the Great Depression. While the US pushback means a transaction tax is unlikely to occur, the mere discussion of it may be enough to unsettle markets.

Banks’ earnings will inevitably come under pressure as governments agree on other proposals to force banks to fend for themselves in a crisis, says Charles Dumas, chairman of Lombard Street Research in London.

“The banking industry is only just starting to realise they won’t be able to go back to business as usual,” said Dumas. “The natural thing to do is go for some kind of insurance premium and higher capital requirements. It probably will reduce profitability, and it should reduce profitability.”

The G-20, which met at the end of a week in which Royal Bank of Scotland became the most expensive bailout ever, plans to discuss how banks can “contribute to paying for burdens” arising from state rescues at its next summit.