Monday, September 21, 2009

Tax havens may well kill "living wills"

We have just blogged about the return of complacency. This takes us back to an article we should have blogged earlier, but overlooked, from the Financial Times. Written on August 13th, it notes the return of complacency, then notes this about living wills (which we have blogged, and which has been very much in the news of late.) Living wills are, in effect, supposed to be pre-set procedures put in place to make sure financial institutions can be wound down in a timely and straightforward way, should they run into trouble.

How are tax havens likely to stymie the introduction of living wills? Gillian Tett of the FT explains:

"In order to make it easy to wind down a large bank, it is crucial to have structures that are relatively simple and streamlined.

However, in the past few decades, the largest banks in the world have stealthily built corporate structures that are fiendishly complex, straddling numerous borders and plagued with offshore entities. Lehman Brothers was but one example of that.

The pattern, of course, is no accident. After all, large investment banks excel in regulatory and tax arbitrage, and all that cross-border complexity and opacity enables them to exploit such loopholes with ease. The pattern is also one reason that the living will idea could be very controversial, if regulators ever try to push it through.

After all, if the banks were ever forced truly to streamline their operations, it might become that much harder to jump between tax regimes, for example.

To my mind, that is one very good reason that the living will idea should be roundly applauded, almost irrespective of whether it might help stem any future crises. The degree to which large banks have been allowed to get away with tax arbitrage in recent years is nothing short of scandalous (and potentially even more shocking than some of their pay practices).

But sadly, this is also one reason that the living will idea may never fly. Six months ago, the largest global banks were on the back foot in political terms as they reeled from the shock of the Lehman Brothers collapse. However, these days they are regrouping with startling speed.

And regardless of all the debate about moral hazard – or having banks that are “too big to fail” – the system is drifting into a pattern where the most dominant lenders are becoming more dominant than ever. Just look at the market concentrations emerging, say, in the wholesale swaps, foreign exchange or bonds arena.

Given that, the regulators themselves are increasingly wary about pushing too many controversial ideas through, not least because they are badly hampered by being fragmented along national lines. “We have got to pick our fights carefully,” one western official explains. Clamping down on the cross-border tax practices of the banks, for instance, is apt to look a battle too far."

It makes depressing reading, doesn't it? Aside from the related issues of liquidity creation, of evading pay curbs, of candy floss, not to mention all this, the "living wills" debate which is prominent in the media right now constitutes yet another reason why tax havens are right at the root of the economic crisis.


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