Tuesday 26 January 2010

Idea: don't tax deposits or transactions, tax risk

While the Obama proposals to limit banking activities and the resulting restructuring of the banking industry are great news for management consultants and IT specialists like me, I can't help feeling that there's a simpler way to crack this one. Ideas like a Tobin tax, locally or internationally, could mess up trade and financial flows.

Levies based on the size of an institution's deposits, such as the HM Treasury's UK Deposit Protection Scheme, are plainly unfair. This scheme penalises the good rather than deterring the bad. Building societies and retail-focused banks have a large depositor base - and funding operations with a large depositor base is a lower risk affair than relying on wholesale funding as Northern Rock did. Building societies lend against physical assets which in theory should represent properly-valued collateral, which is a whole lot less risky than risking your capital in financial operations.

Banks have spent billions over the last five or six years on technology to calculate and assess risk. It's called Basel II. It has holes that the scruffier end of the market could climb through, but so does any set of rules. Despite that, some banks are really quite good at assessing risk, others less so.

Instead of taxing deposits or transactions, we should tax risk. This can be done at different rates depending on the type and the term of the risk, it would be priced into transactions and deter the sillier types of trade, and it would give a huge incentive both to the institutions and to the tax men to assess the risks properly to avoid underpaid or overpaid tax.

That's my opinion. Comment welcome.

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