Financial Regulatory Forum

from The Great Debate:

Taxing spoils of the financial sector

If you want less of something, tax it.

That truism is often used as an argument against a tax on profits, or health benefits, or employment, but in the case of the rents extracted from the economy by the financial services industry here's hoping it proves more of a promise than a threat.

The International Monetary Fund has put forward two new taxes on banks to pay the costs of future rescues, one of which is a fairly conventional "Financial Stability Contribution," with an initial flat levy on all banks, to be refined later into something with more precise institutional and systemic risk adjustments.

More interestingly, the IMF is also proposing a "Financial Activities Tax," (FAT) a tax on bank pay and profits which, if correctly designed, could serve as a tax on rents -- the unwarranted spoils -- of the financial sector.

In economics the concept of "rents", essentially the extra money a given individual or industry is able to extract from its clients above what it would if there were perfect competition, is central. If there is only one cable television provider in your neighborhood you will know what I am talking about.

In financial services, the evidence is that rents are huge, in part because of impaired competition and in part because increasingly complex financial services allow banks to sell clients products that they don't understand, may not need and will almost always be over-charged for. Bank employees in turn charge hefty rents to their bosses, boards and shareholders, each of whom, as you journey up the organizational chart, understand less about the complex services, and like clients, are then less able to defend their own interests.

SCENARIOS – G20 efforts to agree on a bank levy

By Huw Jones

LONDON, March 31 (Reuters) – France backed Germany’s plans for a bank levy on Wednesday to boost momentum for a global deal among the G20 group of leading countries later this year.

But national differences are emerging over details and some countries oppose the principle of a levy or tax.

NEXT STOP WASHINGTON

The IMF was asked last November to put forward proposals for making banks contribute towards bailouts and will present its recommendations to G20 finance ministers in Washington on April 24-25

South Africa to implement financial services reforms

  CAPE TOWN, Feb 17 (Reuters) – South Africa will implement financial regulatory reforms in line with G-20 recommendations, including better management of foreign risk exposure of banks and institutional investors, the National Treasury said on Wednesday.

“As of March 2010, South African banks will be able to acquire direct and indirect foreign exposure of up to 25 percent of their total liabilities (excluding equity), covering all foreign exposure but excluding FDI (foreign direct investment).

“The initial limit of 40 percent has been adjusted downwards in light of recent international developments,” the Treasury said in its 2010 Budget Review.

Global accounting body IASB shores up defences, investor focus

By Huw Jones

LONDON, Feb 15 (Reuters) – The world’s leading accounting standards setter bolstered its defences from political pressure on Monday and reinforced its role as an independent guide to investors rather than a tool for policymakers.

The International Accounting Standards Board (IASB) sets accounting principles that are effectively law in over 100 countries but has been criticised for being aloof and slow to respond to policymaker concerns during the financial crisis.

Its rules will form the bedrock for one set of global standards by mid-2011 as called for by the G20 group of leading nations to improve transparency for investors and cut red tape for companies.

INTERVIEW-UK’s Darling-breaking up banks not the answer

By Sumeet Desai

LONDON, Jan 28 (Reuters) – Breaking up banks and going it alone in reforming regulation is not the magic solution to avoiding future crises, British finance minister Alistair Darling told Reuters on Thursday.

In an interview ahead of going to the World Economic Forum in Davos, Switzerland, Darling also brushed aside concern that UK government bonds were a ticking time bomb, pointing out Britain’s funding requirements were lower than many other countries.

U.S. President Barack Obama sent shockwaves through markets last week with proposals to force commercial banks to cut ties with hedge funds and private equity funds and to stop proprietary trading.

UK’s Brown sees growing support for bank levy

By Keith Weir

LONDON, Jan 25 (Reuters) – British Prime Minister Gordon Brown said on Monday he saw growing support for some form of international levy on banks to fund support for the industry.

A global transactions tax, floated by Brown at a meeting of the Group of 20 nations in Scotland in November, was on the agenda when Treasury Minister Paul Myners hosted officials from G7 finance ministries, the IMF, World Bank and the Financial Stability Board in London on Monday.

“As a result of the advancement by U.S. President (Barack) Obama and the financial secretary Tim Geithner about their levy on wholesale lending, I think the proposals that I made at St Andrews for an international levy … are now gaining currency around the world,” Brown told a news conference.

Obama bank plan surprises Europe, muddies global coordination

By Huw Jones

LONDON, Jan 22 (Reuters) – U.S. President Barack Obama’s plans to rein in banks puts Europe on the back foot and creates confusion over global efforts to coordinate financial regulation, lawyer and regulatory officials said on Friday.

Obama proposed on Thursday to curb banks’ size and risk-taking, sending shares in major institutions down.

Senior officials and lawmakers involved in regulatory policymaking at a global and European level said they had been kept in the dark about the plans.

Merkel says G20 needs to act on big banks’ influence

BERLIN, Jan 20 (Reuters) – The Group of 20 economic powers needs to develop a set of rules to prevent banks becoming so big that they can hold governments to ransom, German Chancellor Angela Merkel said on Wednesday.

“This year is about implementing the regulations that have been agreed during the G20 process,” Merkel told parliament during a budget debate.

“It is also about finding further regulations, and that applies especially for the G20 meetings … to find ways to prevent banks becoming so big or so complex that they can hold us to ransom again,” she added.

Germany’s Merkel says G20 needs to act on big banks’ influence

Merkel warning    BERLIN, Jan 20 (Reuters) – The Group of 20 economic powers need to develop a set of rules to prevent banks becoming so big that they can hold governments to ransom, German Chancellor Angela Merkel said on Wednesday. (more…)

FACTBOX-Global regulators seek to plug supervision gaps

Jan 8 (Reuters) – A forum of global financial regulators put forward 17 recommendations on Friday covering supervision of hedge funds, credit derivatives and mortgages in a bid to plug supervisory gaps highlighted by the financial crisis.

The G20 group of countries, which is spearheading reform of financial regulation at the global level, asked the forum last November to come up with recommendations.

Policymakers saw flaws in how supervisors of securities, insurers and banks worked together, with some firms able to exploit gaps. The recommendations comprise a marked shift in the parameters of regulation and supervision.

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