Balancing the Regulation and Taxation of Banking

Balancing the Regulation and Taxation of Banking

Sajid M. Chaudhry, Andrew W. Mullineux and Natasha Agarwal

This concise book gives a unique overview of bank taxation as an alternative or a compliment to prudential regulation or non-revenue taxation. Existing bank taxation is reviewed with a view to eliminating distortions in the tax system, which have incentivized banks to engage in risky activities in the past. The authors analyse the taxation of financial instruments trading, as well as the taxation of banking products and services to gauge whether this could finance resolution mechanisms and also help to ensure the stability of banks.

Chapter 1: Introduction

Sajid M. Chaudhry, Andrew W. Mullineux and Natasha Agarwal

Subjects: economics and finance, financial economics and regulation, international economics, money and banking

Extract

Since the ‘Global, or Great, Financial Crisis’ (GFC) of 2007–2009, policy makers and regulators have been seeking the best approach to ‘taxing’ financial institutions and their activities in the financial markets. There are a number of ways of taxing banks, with the goals of improving their stability, and dissuading them from engaging in overly risky activities while also raising tax revenue. One way is through regulations and another is through imposing direct ‘fiscal’ taxes that raise revenues. Hitherto, regulations have been the dominant approach to ensuring the stability of banks and the banking sector. The post-crisis Basel III framework strengthens the minimum risk-related capital requirements outlined in Basel I and Basel II and also introduces new regulations in the form of bank liquidity requirements and bank leverage ratios. Nevertheless, the big banks remain implicitly insured by taxpayers and can consequently raise funds more cheaply than less strategically important banks that are deemed not to be too big or too complex to be allowed to fail. This gives the big banks a competitive advantage and reinforces their dominance. In response to this, systemically important financial institutions are increasingly required to hold supplementary capital as recommended by the Financial Stability Board (FSB, 2011), and attention is now turning to TLAC, the total loss absorbing capacity of banks and the banking system (Mullineux, 2014). The GFC revealed problems with the regulatory approach to addressing externalities arising from excessive bank risk taking and from the ‘too big (or complex) to fail’ problem.