Decision-Time for the ‘International Bank Tax’

In Economics, Financials, Politics on June 18, 2010 at 15:01

Ever since the global financial crisis burst in 2008, there has been an ongoing debate about the prospect of imposing levies on banks and their transactions to form a fund that would prevent the repetition of potential bank collapses (i.e. Lehman Bros.) that could jeopardise the global financial web. This is one of the hottest topics on the EU agenda awaiting next week’s G20 meeting.

The imposition of an ‘international bank tax’ sounds a very interesting venture to me but rather complicated and risky for the participant countries. First of all, its structure and main features haven’t been clarified yet. What to tax exactly? At what rate? Will there be a common rate across countries? When can the troubled banks make use of the fund? All these are vital aspects of this radical step which ought to be specified as soon as possible.

I see very warmly this prospect of introducing the ‘bank tax’ but I also want to stress the risks of it. The absence of a common/homogeneous ‘bank tax’ across countries is likely to alter the financial landscape and create new imbalances between ‘financial hubs’ causing the massive outflows of funds from those countries with a heavy tax. If Europe, let’s say, sets higher levies on its banks’ turnovers or transactions than the US, the European banking sector automatically becomes less profitable with lower returns which may translate into a vicious circle of less funds available to European banks and slower economic development for the region.

Moral hazard is another threat; the creation of such a fund to prevent bank collapses, may also nurture a more risky attitude of banks, as they can always utilise the fund in case of a potential failure. Last but not least, national governments should use honest criteria in the setting of such a tax that are serving the sustainability of their economy and not their short-term opportunistic goals. For example, economies with wide budget deficits like Greece and Spain, could abuse the ‘bank tax’ to absorb as many funds as they can from their domestic private banks just to achieve a ‘spectacular’ improvement in fiscal position and have the opportunity to brag about it during elections.

I remain optimistic on this issue as I believe that banks have been ‘free-riding’ for decades on peoples’ misinformation and states’ ignorance and impotence. A robust global financial system is the backbone of a well-functioning global economy. We all saw Lehman’s adverse spillovers and hope we wont’s face similar phenomena anytime soon. The ‘international bank tax’ should be homogeneously imposed across economies, on banks’ turnover and not on their transactions as fast money circulation is essential for liquidity. Finally, the funds from this new tax should be carefully and honestly treated, solely for the protection of the domestic and global financial system.

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