Tag Archives: Anti-crisis plan

Taxation of the financial sector

Taxation of the financial sector

Outline of the Community (European Union) legislation about Taxation of the financial sector

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: general framework

Taxation of the financial sector

Document or Iniciative

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions of 7 October 2010 – Taxation of the Financial Sector [COM(2010) 549 final – Not published in the Official Journal].

Summary

This Communication proposes further exploration of two tax instruments which could be applied to the financial sector:

  • Financial Transactions Tax (FTT);
  • Financial Activities Tax (FAT).

Why are new taxes on the financial sector required?

The financial sector is regarded as one of the main sectors responsible for the 2008 crisis, particularly for the considerable growth in government debt in the world. As a result, the European Commission believes that the application of specific taxes to this sector could have the following positive effects:

  • these taxes could complement the essential regulatory measures which aim at enhancing the efficiency and stability of financial markets and reducing their volatility;
  • these taxes would enable the financial sector to contribute to national budgets in return for the support they received during the crisis;
  • these taxes could enable the financial sector to contribute more to public finances given that the majority of financial services are exempt from Value Added Tax (VAT) in the European Union (EU).

What is the Financial Transations Tax (FTT)?

The FTT would tax the value of each transaction relating to:

  • equities;
  • bonds;
  • currencies;
  • derivatives.

According to an estimate based on 2006 figures, if this tax had been implemented in that year, the tax revenues would have been around EUR 60 billion, with a rate of 0.1 % on stocks and bonds transactions.

The advantage of such a tax might lie in the application of the ‘polluter pays’ principle. This tax could reduce ‘undesirable’ operations by penalising short-term transactions. However, it would need to be applied by several financial centres in the world in order to achieve market stability and prevent relocations. For these reasons, the Commission believes that a global FTT would be the most appropriate.

What is the Financial Activities Tax (FAT)?

The FAT is an instrument which has been proposed by the International Monetary Fund (IMF). It has the following elements:

  • in principle it falls on total profit and wages;
  • it can be designed to specifically target economic rents and/or risk;
  • it taxes corporations.

The implementation of this tax, with a rate of 5 %, by the 22 ‘developed economies’ identified in the IMF report to the G-20, could generate the equivalent of 0.28 % of their GDP. At EU level, the tax revenues could be EUR 25 billion.

In principle, the FAT does not change the prices of financial instruments and does not affect the market structure. However, it could encourage profit shifting via relocating income and remuneration outside the EU. Certain technical aspects of this tax still need to be examined further in order to avoid such practices. The Commission believes that the implementation of the FAT would be more relevant at EU level.

Context

In its Resolution on financial transaction taxes of 10 March 2010, the European Parliament asked the Commission and Council to look at how a financial transaction tax could be used to finance development cooperation, help developing countries to combat climate change and contribute to the EU budget. In June 2010, the European Council insisted on the leading role that the EU should take in this area as part of a global strategy. However, there is currently no global consensus on additional tax instruments in the financial sector.

Bank Resolution Funds

Bank Resolution Funds

Outline of the Community (European Union) legislation about Bank Resolution Funds

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Single market for services > Financial services: banking

Bank Resolution Funds

Document or Iniciative

Communication of 26 May 2010 from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the European Central Bank – Bank Resolution Funds [COM(2010) 254 final – Not published in the Official Journal].

Summary

This Communication defines the European Commission’s intentions concerning the establishment of Bank Resolution Funds.

What is the role of Bank Resolution Funds?

Resolution funds should contribute to financing the orderly resolution of distressed banks. In order to do this, they could implement measures such as:

  • financing bridge banks;
  • financing a total or partial transfer of assets and/or liabilities from the ailing entity;
  • financing a good bank/bad bank split.

Resolution funds may also be used to cover administrative costs, legal and advisory fees.

However, they must not play the role of insurance against failure or be used to bail out failing banks.

How can Bank Resolution Funds be financed?

The Commission considers that financing arrangements for a fund should procure the necessary resources whilst incentivising appropriate behaviour.

Three points could form the basis for calculating contributions to Bank Resolution Funds:

  • banks’ assets could represent an indicator of the amount which might need to be spent in handling the bank’s resolution. A levy could be established based on the assets and could therefore amount to an additional capital requirement;
  • banks’ liabilities could also represent indicators of the amount which might need to be spent in handling the bank’s resolution. However, liabilities could be less effective proxies for the degree of risk;
  • profits and bonuses could be used as a reference in order to determine the amount of levies.

Financing arrangements should meet the following criteria:

  • avoid any possible arbitrage;
  • reflect the appropriate risks;
  • take into account the systemic nature of certain financial entities;
  • be based on the possible amounts that could be spent if resolution becomes necessary;
  • avoid competition distortions.

What means of governance should be used for Bank Resolution Funds?

Bank Resolution Funds should remain separate from the national budget and be dedicated only to resolution costs.

The management of these funds should be entrusted to the authorities responsible for the resolution of financial entities acting as independent executive bodies.

The use of resolution funds should also respect the EU State aid rules.

The Commission plans to adopt legislative proposals for crisis management and resolution funds by early 2011.

How can bank resolution funds be integrated into a new financial stability framework?

The Commission has proposed to strengthen capital requirements and to reform financial supervision within the EU. It intends to strengthen Deposit Guarantee Schemes and the corporate governance of financial institutions.

The Commission also intends to implement preventive measures in order to mitigate the risks of bank failures and to reduce the implicit guarantees associated with institutions deemed ‘too big to fail’.

The Commission has also planned to adopt in October 2010 a roadmap on a European framework for crisis management. The aim of the new proposed framework is to make common tools, which enable prompt and effective action to be taken in the event of banking failures, available to Member States. These measures should not lead to costs for taxpayers.

Tools are proposed to complement the action of resolution funds:

  • Recovery and Resolution Plans;
  • debt to equity conversions.

Defining a common approach to Bank Resolution Funds

A European and global approach should be defined as regards the creation of Bank Resolution Funds.

Under this new measure, national authorities will continue to be responsible for day to day supervision, and this should be underpinned by a solid cross-border framework which is ready to address possible crises.

The first step in this common approach lies in establishing a system based on a harmonised network of national funds linked to a set of coordinated crisis management arrangements. This system should be re-examined by 2014 with a view to creating EU integrated crisis management and supervisory arrangements, as well as an EU Resolution Fund in the longer term.

Context

In order to mitigate the bank failures caused by the October 2008 financial crisis, the governments of Member States have provided State aid to assist the financial sector. This aid has considerably affected taxpayers and has increased Member States’ public debt. The creation of resolution funds should prevent future recourse to State aid to resolve financial institutions’ failures.

Driving European recovery

Driving European recovery

Outline of the Community (European Union) legislation about Driving European recovery

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Internal market: general framework

Driving European recovery

Document or Iniciative

Communication for the spring European Council of 4 March 2009 – Driving European recovery – Volume 1 [COM(2009) 114 final – Not published in the Official Journal].

Summary

This Communication sets out different measures to be taken to trigger a recovery in Europe following the financial crisis which started in summer 2007 and which became large-scale in late 2008. It presents an ambitious programme which aims at:

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  • reforming the financial sector;
  • sustaining demand;
  • boosting investment;
  • retaining or creating jobs.

Restoring and maintaining the stability of the financial sector

The report presented by the De Larosière Group (pdf ), makes supervision the cornerstone of a stable financial system.

The European Commission intends to establish a supervisory framework to detect potential risks related to financial markets early on by means of:

  • a European body to oversee the stability of the financial system as a whole;
  • a European financial supervision system.

Security must also be an integral part of future European regulations. To this end, the Commission plans for:

  • a legislative instrument which establishes regulatory and supervisory standards for hedge funds and private equity;
  • a White Paper on tools for early intervention to prevent a possible crisis;
  • a report on derivatives and other complex structured products to increase transparency and ensure financial stability;
  • legislation to increase the quality and quantity of prudential capital, to address liquidity risk and limit excessive leverage.

With the aim of rebuilding the confidence of European investors, consumers and small and medium sized enterprises in their economies, their access to credit and their rights as concerns financial products, the Commission willundertake action in the following areas:

  • increasing the efficiency of marketing safeguards for retail investment products;
  • strengthening protection for bank depositors, investors and insurance policy holders;
  • the introduction of measures on responsible lending and borrowing.

The remuneration of employees in the financial sector and its directors is also under consideration through a package of legislative proposals which aim at submitting them to prudential oversight.

Finally, a harmonised system of sanctions should be introduced in order to prevent market abuse.

Supporting the real economy

The Single Market should continue to be the motor of economic and social prosperity in the European Union (EU). To this end, Member States should increase their support for the real economy by implementing the following principles:

  • eliminating barriers to the free movement of goods and services;
  • implementing structural changes which meet climate and energy challenges through the promotion of a low carbon economy;
  • promoting the exchange of good practices and synergies in terms of European cooperation;
  • keeping the Single Market open to trade partners.

Supporting the population

The crisis has also had negative consequences on the labour market and has accentuated problems of unemployment and social exclusion. In order to combat these issues, the Commission invites Member States to initiate action in the following areas:

  • keeping people in employment;
  • reinforcing activation and providing income support;
  • investing in re-training and skills upgrading;
  • preventing over-indebtedness and maintaining access to financial services;
  • guaranteeing free movement of workers;
  • implementing support measures for unskilled workers;
  • combating school drop-out;
  • promoting flexicurity in terms of employment protection.

Context

Part of this Communication was proposed in preparation for the G20 summit in London (April 2009). The following proposals were made with the aim of mitigating the deficiencies of the global economy caused by the crisis:

  • strengthening the global financial architecture;
  • strengthening the financial framework.