The International Monetary Fund (IMF, 2010) proposes the use of taxes and regulations to counteract micro- and macro-prudential risk in the financial system. Although regulations have traditionally been used to try to ensure banking stability, their focus has primarily been on micro-prudential regulation and supervision. The GFC emphasized the need for a macro-prudential framework that can address systemic risks and hence focus on the stability of the financial system as a whole. We portray the taxation of banks as a macro-prudential regulation. This idea of using regulatory ‘taxes’ and other micro- and macro-prudential policy measures, including the implementation of fiscal taxes and surcharges and credit controls, has been pursued by policy makers around the world for some time. For instance, a number of Asian countries, including Hong Kong, have long used restrictions on loan-to-value ratios, capital inflows and other ad hoc measures to limit internal or external vulnerabilities. Over a decade ago, the General Manager of the Bank for International Settlements (BIS), Andrew Crockett (2000), proposed marrying the bank-specific micro-prudential and the systemic macro-prudential dimensions of financial stability in a speech that proved prescient. Keen (2011) considers the choice between taxation and regulation measures to bring about the stability of a financial system. He lists the following factors that can help balance tax and regulatory measures: 1) income effects; 2) uncertainty; 3) asymmetric information; and 4) institutional issues. First, taxation strengthens public buffers to address bank failure and crisis, whereas regulation focuses on private buffers.
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