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Steal from the rich ..and the rest of Europe too

Regulations being proposed and imposed on the financial world are coming thick and fast. Not content with the sheer weight of regulation looming in the OTC derivatives markets, European regulators are now contemplating what appears to be a serious proposal to introduce a transaction tax on bond, share, and derivative transactions. Otherwise known as the ‘Tobin’ or ‘Robin Hood’ tax, banks will be charged 0.01 – 0.1% per transaction in a ‘give back to the economy’ taxation mission spearheaded by the European Commission.

First point is that some seem to think this is an attack specifically on high frequency trading (HFT) or offensively wealthy maverick undue-risk-taking bankers. It is not. A tax measured in basis points on the trade, without any additional per-ticket charge, affects all types of financial institutions subject to it in equal proportion. The upshot is that every organisation subject to the tax will need to consider their business case to move to a lower taxed jurisdiction, and/or to change their trading strategy so the tax is less material to each trade’s success. 

These forced changes to trading strategies should concern us the most. Firms will withdraw from the market when the tax means their strategy is no longer viable, and remaining participants will likely reduce volumes traded given the tax is volume sensitive. With less active participants and opportunities, market making will become more difficult. Trading venues will close. Affected markets will become increasingly less liquid, reducing the tax take, and creating knock-on impact way beyond financial institutions. The Commission should consider whether it is acceptable that corporate and industrial firms will find it increasingly challenging to locally fund their Eurozone investment projects through primary market activity in these less liquid markets.

It is ironic and astounding that on one hand we have a clear call from regulators to align legislation in order to prevent regulatory arbitrage as a result of OTC clearing reform, while on the other hand we have a genuine proposal for a unilaterally implemented and fundamental change to market operation which distances Eurozone markets from other continents.  

While there is a political will to bash bankers and an obvious need to reassure the taxpayer that banks are playing their part in the economic recovery, this recent proposal is a short-sighted, headline-grabbing initiative which will result in Europe being a less competitive market place across all industries – not just banking.  If the intent is to tax particular financial institutions, surely the most transparent way to do this would be to introduce a financial institutions tax tailored to size and type of institution, rather than interfering directly with market operation and triggering far more damaging consequences.



Comments: (2)

A Finextra member
A Finextra member 11 October, 2011, 21:04Be the first to give this comment the thumbs up 0 likes

Sounds like you are better placed than I to know, but I have an opinion too and thought I would share the link to the Robin Hood site for others to decide:

I definitely agree that there is " obvious need to reassure the taxpayer that banks are playing their part in the economic recovery" since the general opinion seems to be that Banks are still too large to fail and they make hay whichever way the wind blows, with others' money.

Would a RH tax really make those countries adopting it a pariah for banking?  I think there are bigger costs that matter.


A Finextra member
A Finextra member 14 October, 2011, 09:31Be the first to give this comment the thumbs up 0 likes

The Robin Hood site correctly states that the recipe needs to be right in order for this to be a success.  The European proposal for a unilaterally implemented financial transactions tax (FTT) - placing European financial institutions at financial disadvantage to non-resident competition, as well as essentially disincentivising business growth through trading activity - unfortunately has ingredients to only damage the market.  Doing this at the same time that increased capital requirements are being set, in an environment where European sovereign debt held is dropping in value and bank ratings are already reducing, clearly does not give the right recipe for European growth

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