Financial Trade Tax Seen To Avoid Bloated Finance Sector
http://online.wsj.com/article/BT-CO-20091126-707066.html
(Dow Jones)--Financial transaction taxes and higher capital requirements are legitimate ways to reduce the size of banks so they don't become too big to fail and contribute to an over-sized financial sector, a report from a group of academics said Friday.
A financial sector which has grown too large is usually characterized by a focus on non-core activities, such as short-term trading, and not on providing the long-term savings and investment business that is crucial to households and companies, a report from the Warwick Commission said in a report on international regulation.
"Refocusing regulation on capacity will encourage smaller balance sheets and more specialised institutions," the report said. "Taxes on financial institutions and additional capital requirements for large institutions are legitimate ways of trying to internalize social externalities onto bank behaviour."
The International Monetary Fund is currently analyzing how financial institutions could be made to help fund future government bailouts, including through the use of what is commonly known as a Tobin tax, after Nobel-winning economist James Tobin who proposed a tax on foreign-currency transactions to reduce volatility in the 1970s.
U.K. Prime Minister Gordon Brown called for a financial transactions tax during a meeting of finance officials from the Group of 20 industrial and developing countries earlier this month although the proposal was criticized by other countries. U.S. Treasury Secretary Timothy Geithner said he wouldn't support a day-by-day financial transactions tax.
Adair Turner, the chairman of the U.K. Financial Services Authority, said in a magazine interview during the summer that, if stricter capital requirements don't prevent excess pay, profits and risk-taking by banks, the U.K. should consider applying transaction taxes.
Turner, in a comment on the Warwick Commission's report, said its "insistence on the need to consider the right-sizing not only of specific institutions but of finance in total are particularly useful."
A bloated financial sector, involved in riskier activities, makes the impact of a crisis worse and means the over-sized banks which operate in it, have undue influence on governments to force a bailout, the report said.
The report said systemically-important banks should have to retain higher capital against market losses and meet tougher disclosure requirements than smaller institutions to reduce the chance they will get into trouble. It said regulators should use system-wide stress tests to determine which ones are the riskiest firms.
"Systemically important institutions will balk at this special treatment and regulators will likely end up using crude but transparent criteria of what is systemically important...this would still be better than making no distinction...," the report said.
It also recommended greater emphasis be placed on host-country regulation under which banks are regulated by the supervisors in each country in which they operate rather than by the regulator in their home country. Currently, bank units are usually overseen by the host regulator while branches are supervised by home bodies.
The flaw in this system came to the fore when the U.K. government had to compensate depositors who lost money invested in the U.K. branches of three Icelandic banks that became insolvent in 2008 even though the FSA had little prudential regulatory power over them.
To compensate for this national focus, the report says there needs to be greater cooperation between regulators around the world so they maintain similar standards and don't allow firms to simply move their business to laxer financial centers.
Greater emphasis must be placed on host country regulation within a more legitimate system of international cooperation, the report said.
http://online.wsj.com/article/BT-CO-20091126-707066.html
(Dow Jones)--Financial transaction taxes and higher capital requirements are legitimate ways to reduce the size of banks so they don't become too big to fail and contribute to an over-sized financial sector, a report from a group of academics said Friday.
A financial sector which has grown too large is usually characterized by a focus on non-core activities, such as short-term trading, and not on providing the long-term savings and investment business that is crucial to households and companies, a report from the Warwick Commission said in a report on international regulation.
"Refocusing regulation on capacity will encourage smaller balance sheets and more specialised institutions," the report said. "Taxes on financial institutions and additional capital requirements for large institutions are legitimate ways of trying to internalize social externalities onto bank behaviour."
The International Monetary Fund is currently analyzing how financial institutions could be made to help fund future government bailouts, including through the use of what is commonly known as a Tobin tax, after Nobel-winning economist James Tobin who proposed a tax on foreign-currency transactions to reduce volatility in the 1970s.
U.K. Prime Minister Gordon Brown called for a financial transactions tax during a meeting of finance officials from the Group of 20 industrial and developing countries earlier this month although the proposal was criticized by other countries. U.S. Treasury Secretary Timothy Geithner said he wouldn't support a day-by-day financial transactions tax.
Adair Turner, the chairman of the U.K. Financial Services Authority, said in a magazine interview during the summer that, if stricter capital requirements don't prevent excess pay, profits and risk-taking by banks, the U.K. should consider applying transaction taxes.
Turner, in a comment on the Warwick Commission's report, said its "insistence on the need to consider the right-sizing not only of specific institutions but of finance in total are particularly useful."
A bloated financial sector, involved in riskier activities, makes the impact of a crisis worse and means the over-sized banks which operate in it, have undue influence on governments to force a bailout, the report said.
The report said systemically-important banks should have to retain higher capital against market losses and meet tougher disclosure requirements than smaller institutions to reduce the chance they will get into trouble. It said regulators should use system-wide stress tests to determine which ones are the riskiest firms.
"Systemically important institutions will balk at this special treatment and regulators will likely end up using crude but transparent criteria of what is systemically important...this would still be better than making no distinction...," the report said.
It also recommended greater emphasis be placed on host-country regulation under which banks are regulated by the supervisors in each country in which they operate rather than by the regulator in their home country. Currently, bank units are usually overseen by the host regulator while branches are supervised by home bodies.
The flaw in this system came to the fore when the U.K. government had to compensate depositors who lost money invested in the U.K. branches of three Icelandic banks that became insolvent in 2008 even though the FSA had little prudential regulatory power over them.
To compensate for this national focus, the report says there needs to be greater cooperation between regulators around the world so they maintain similar standards and don't allow firms to simply move their business to laxer financial centers.
Greater emphasis must be placed on host country regulation within a more legitimate system of international cooperation, the report said.
