ECB Offers to Assist in Design of Controversial Financial Transaction Tax
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The European Central Bank has offered to assist the EU in the redesign of its planned financial transaction tax (FTT) to ensure the levy does not destabilise financial markets, an indication that the central bank has joined the ranks of sceptics and has ‘deep reservations’ about its impact on the real economy, reported the Financial Times.
The tax is intended to ensure that the financial sector shares the cost of the banking crisis, and is supported by Germany and 10 other eurozone countries who hope the levy will encourage more responsible behaviour by bankers.
The European Central Bank has offered to assist the EU in the redesign of its planned financial transaction tax (FTT) to ensure the levy does not destabilise financial markets, an indication that the central bank has joined the ranks of sceptics and has ‘deep reservations’ about its impact on the real economy, reported the Financial Times.
The tax is intended to ensure that the financial sector shares the cost of the banking crisis, and is supported by Germany and 10 other eurozone countries who hope the levy will encourage more responsible behaviour by bankers.
The tax, likely to be levied at 0.1 percent on shares and bonds and 0.01 percent on derivatives, is expected to come into effect from January 1, 2014 and the European Commission projects the FTT will raise around 35 billion euros ($45 billion) a year in revenues.
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While the ECB has not publicly commented on the tax, pointing out it has no mandate on the matter, executive board member Benoit Coeure told the FT on Sunday the bank is willing to “engage constructively” in the design of the tax.
He said:
[quote] We’re willing to engage constructively with governments and the European Commission to ensure that the tax has no negative impact on financial stability. [/quote]Specifically, the ECB is looking at the FTT’s impact on bond trading and the market for repurchase agreements, by which assets such as government bonds are sold temporarily for cash and are an essential source of daily liquidity in the financial system, said the FT.
The ECB believes markets should efficiently “transmit” changes in interest rates to the real economy and would almost certainly advocate exempting the “repo” market from the tax, as well as steps to ensure costs did not increase for businesses using derivatives when hedging conventional trades.
But the planned FTT has run into strong opposition from the financial industry which warns that the levy could increase costs substantially for investors and erode bank profits.
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Last week, Nils Schmid, a leading German politician criticised plans for the FTT as “rubbish” and said the region’s banks might not be able to cope with the additional burdens of the levy should member states approve the European Commission’s current draft version.
“The result would be that banks no longer lend each other money,” he said, adding the tax’s repercussions could also hurt companies and individual borrowers and savers.
