Q+A: How could a global levy on banks work?

ST ANDREWS, Scotland (Reuters) - Britain urged world governments on Saturday to consider a levy on banks to fund future bailouts, though there was little sign of the consensus needed to put the idea into practice.

HOW WOULD IT WORK?

Not clear. The International Monetary Fund will study the matter and present options next April for the Group of 20 nations to discuss.

Several ideas are being floated including a tax on financial transactions and a sort of "insurance fee" which banks would pay, perhaps into a global fund that would be tapped to help a bank in trouble.

The IMF has said banks could likely find ways around a transaction tax, and that a "windfall tax" or other longer-term form of levy might be better.

IMF managing director Dominique Strauss-Kahn told Reuters on Sunday that his organization was exploring the idea of an insurance fee.

WHAT SIZE OF LEVY WOULD BE IMPOSED?

Some G20 officials say the rate of a tax would be very low, perhaps around 0.005 percent of each transaction.

But officials also say the amount collected should be high enough to cover the costs involved, to avoid taxpayers having to stump up yet more money.

Estimating these potential costs would be extremely difficult technically, and politically controversial.

WHO SUPPORTS THIS AND WHO IS AGAINST?

For fear of damaging national financial sectors, governments would probably not be willing to introduce a levy unless it were imposed simultaneously in all major financial centers.

France, Germany and the European Commission have previously said they would support the idea as long as the levy was introduced globally.

The United States is against a transaction tax but has kept the door open to other ways of making banks pay for their mistakes.

Canada said a transaction tax would be unattractive. Sweden said it would prefer a fee linked to a bank's balance sheet.

While banks around the world could be expected to lobby against any major levy, it would likely be popular among many angry taxpayers, so banks might have to mute their opposition.

Many developing countries, which have suffered because of the financial crisis in the developed world, would be glad to see steps that reduced the risk of fresh instability due to reasons beyond their control.

WHO WOULD ADMINISTER THE MONEY?

This could be a major difficulty in implementing the scheme, because simply giving it to a government's treasury or other government agency could invite misuse.

Critics say it would be difficult to ringfence money raised to bail out banks when financial markets were strong and there was demand for cash for other priorities such as fighting climate change.

Banks say any mechanism for creating a fund should be implemented consistently across the world -- one of the key conditions which Britain outlined on Saturday.

Illustrating the possible political pressure for money to be diverted, Oxfam, which campaigns on behalf of poor countries, said a global financial transaction tax could potentially raise 690 billion pounds a year to help those affected by the economic crisis in rich and poorer countries.

(Reporting by Huw Jones; Editing by Andrew Torchia)