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International Banking Federation Slams FTT Plans

by Ulrika Lomas,, Brussels

30 April 2013

The International Banking Federation (IBFed) has written to Irish Finance Minister Michael Noonan to express its "strong opposition" to the European Commission’s proposed financial transaction tax.

Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia are progressing with plans for an FTT along the lines of "enhanced cooperation." This procedure, which enables those states wishing to work more closely together to do so, was authorized by the European Council of Economic and Financial Affairs (Ecofin) in January. Under the European Commission's plans, all share and bond transactions will be taxed at a rate of 0.1%, and derivatives transactions at 0.01%. The tax is intended to apply from January, 2014.

IBFed represents institutions including the American Bankers Association and the European Banking Federation. Writing on its behalf, IBFed managing director Sally J. Scutt warns Noonan that pursuing an FTT in the current circumstances risks making a bad tax even worse.

Of particular concern is the FTT's "broad scope and extraterritorial nature," which means that although a number of IBFed's member banks are established in non-FTT jurisdictions, they will nevertheless be subject to the tax. This scope "runs counter to internationally accepted tax principles and creates an unnecessary deadweight loss," and will result in those outside the FTT jurisdictions seeking to minimize their engagement with those within the EU11. The impact on financial instruments issued in FTT jurisdictions will be rapid and negative, with the tax factored into purchase decisions and counterparties in non-FTT jurisdictions likely to demand rate or price adjustments to compensate for the tax.

"The end result would likely be a reduction in the profitability, size, and strength of financial institutions within the FTT jurisdictions, with a detrimental effect on the non-financial economy within these jurisdictions," Scutt stresses.

IBFed is also concerned that the European Commission seems keen to "force financial institutions to change their business model and encourage them to make longer term investments." The letter argues that "market making and risk management activities play an important role in the financial system," but contends that the FTT "will result in a significant decrease in market volumes, notably from market-makers, and a material reduction in the volume of derivatives which financial institutions use to manage their risks."

An annex to the letter addresses a number of additional impacts, including increased costs for funding and repo funding, for diversification, hedging and bank stakeholders, and for savings and retirement products. It also claims that the FTT has a "cascade effect," which would be most pronounced on end users such as non-financial businesses and small and medium-sized enterprises.

TAGS: Finance | tax | investment | business | European Commission | Belgium | Portugal | Slovenia | retirement | tobin tax | Estonia | Slovakia | tax rates | Austria | France | Germany | Greece | Italy | Spain | tax reform | European Union (EU) | Europe

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