Wednesday, September 23, 2009

Tax havens help make banks too big to fail

We recently noted how tax havens may kill proposals for living wills, currently all the rage among people who want to prevent a repeat of the conditions that caused the last crisis. Now consider this. First, from the FT this morning:

"European central bankers argue behind closed doors about bank collapses because there is an inherent contradiction between the global structure of large financial institutions and the nationally elected – and funded – governments that rescue them.

Logically, as the Basel report points out, there are two ways to resolve this: either governments must make global arrangements – including agreeing how to share the burden for rescuing institutions such as Lehman – or banks should be capable of being neatly divided into parts when trouble occurs.
. . .
That has alarmed British banks with big international operations such as Barclays and Standard Chartered which – at the extreme – might have to reconstitute themselves into a bundle of national operations, each with ring-fenced assets and liabilities and a separate capital pool, under a global holding group."


In other words, cut them up into neat country-by-country segments. No prizes for guessing what kind of international accounting standards would complement that. (If you can't guess, then click here.) If you haven't already seen it, look at the Barclays quote in this story to see what kind of special pleading the banks are engaging in to try and attack this proposal.

But that is not all. First, along with country by country reporting, we are getting going with another project which could play a massively useful role. More on that to come.

Second - now here is something worth thinking about. Banks say they need to be big to compete in international markets. A large part of what they mean is that - in order to "compete" (this has nothing to do with real market competition, of course, though that's not what we're driving at here,) they feel the need to use tax havens (in conjunction with derivatives, trusts and other off-balance sheet wheezes) so as to dodge regulatory requirements and to dodge tax.

Remember our recent research, highlighting how the largest user of tax havens in every country we surveyed was a bank.

They are saying "we need global reach, via tax havens, in order to compete in the market place. A country like Britain or the United States that tries to prevent its banks diving into the havens will find its national banking champions squashed by its more abusive, offshore-diving foreign rivals. Why is this? Well, there are several aspects to this. First, the banks themselves, boosting their own profits directly, using offshore tricks. Second, there is the banks' wealthy clients, who use the secrecy jurisdictions to boost their profits - and the more strenuously "offshore" a bank is, the more of this money they can attract. A third factor is the governments, especially of Britain and the United States, which have watched over the offshore system with a benevolent eye, in pursuit of this twisted, false notion of competitiveness. It is an unholy trinity: the private sector operators (the banks, lawyers, accountants and so on); their clients; and the jurisdictions that create their secret playgrounds.

In short, Britain and America shy away from cracking down on tax haven activity, and their banks get to keep their gigantic global reach.

And what does that mean? Giant global reach means something else. Too Big To Fail, or TBTF.
And here we get to the heart of the generic problem with banks.

So, not content with having taxpayers subsidise their profit and loss account via tax havens, they also get taxpayers to subsidise their risk-taking.

To tackle the TBTF problem, you have to tackle tax havens. This is not just about information sharing, important though that is. It requires a much bigger offensive than anything we've seen to date.

John Gapper of the FT poses an interesting question for banks at this point. If you think that dividing yourselves into disposable chunks is a bad idea, have you got a better one?

Hat tip: Nick Hildyard, Corner House, for a couple of interesting insights.

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