Robert Peston is an annoying television presenter , although living proof that competence can overcome a poor TV delivery. But on occasion he delivers the goods, and has in a blog I can heartily recommend.
So how big has been the recent boom in some parts of the banking industry?
Big enough, according to new figures released this morning by the Bank for International Settlements (the central bankers' central bank, as if you didn't know) and the Bank England.
According to the results of their latest triennial survey, global foreign exchange turnover rose 20% to $4trn per day on average (yes, that's each single day) in April 2010 compared with April 2007.
What's more, London's portion of this business has increased even faster, by 25%, so UK based banks' share of forex business is a market-leading 37%.
That’s not the only market’s that grown:
As for over-the-counter interest rate derivatives (transactions that are largely bets on the direction of interest rates), these rose 24% globally to $2.1 trn.
And Britain's share of these trades was a striking 46%, up from 44% in 2007.
And who is doing the trading:
Non-financial companies were responsible for just 13% of forex transactions, their lowest proportion for 12 years.
By contrast, "other" financial institutions - such as hedge funds, insurers, mutual funds and so on - contributed a record 48% of the business.
As he says:
Well some would view these statistics as evidence that the banking industry has become more than slightly detached from the "real" economy, that many of its activities are either pure speculation, or attempts to hedge speculation, or attempts to hedge the hedges.
Also, it would be pretty difficult to argue that the net effect of all this financial business has been to reduce the volatility of markets, or to improve the stability of the global economy, or to increase the growth rate of the global economy.
To put things in proportion:
And there is a massive disconnect between a global economy that has less than doubled in size over 12 years and - on the other hand - OTC derivative transactions that have increased eight fold while foreign exchange transactions have almost trebled in value.
What's more, as I've pointed out before, the global economy was growing quite as fast in the 1960s when much of this financial business barely existed.
His conclusion?:
So those who can't see the point of all these financial trades may (ahem) have a point - unless, that is, you believe the enrichment of financial traders and hedge fund managers is a social good in itself.
Which is why, some would say, it's slightly odd that when no less an authority than the chairman of the Financial Services Authority, Lord Turner, questions the social utility of much activity in financial markets, and also suggests that it might be no bad thing to levy a tiny Tobin tax on all this frenetic trading in electrons, well it's curious that the chancellor of the exchequer (who could use a bob or two) doesn't lick his chops and demand a bit of that.
There’s little to add to that really, is there?
Except to refer to my own report on the issue — which tackles many of the objections to such a tax. I’m well aware the City said I got it wrong. But they would say hat, wouldn’t they? And the facts contradict them.
Hat tip to Howard Reed
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Apologies if I missed this in your paper, but isn’t the threshold difficulty with an FTT that it’s only viable if all the major economies (at least) adopt it at the same time? Otherwise you’ll just shift activity from one financial centre to the other.
Given that there is no international consensus on the issue, that suggests the FTT is dead in the water and all the many other arguments for and against it quite irrelevant.
Incidentally, your report suggests you may not appreciate that most trading in UK equities is not in fact subject to stamp duty/SDRT. There is a well known reason for this – email me offline if you’d like the background.
@Marc Daniels
a) Global is not needed – UK does charge stamp duty after all – the argument against relocation is largely spurious (markets don’t move as a matter of fact – London is where it is for good reason) – and can be tackled by anti-avoidance legislation anyway
b) On currency transactions it has been proven any state can do it on its own currency worldwide
c) Sure, I know about contracts for difference
It’s a little harsh to call Robert annoying. He is knowledgeable, idiosyncratic and he is neither just a pretty airhead with BBC fashioned mannerisms and delivery who is able to read an autocue nor unpleasantly aggressive. I find him charming.
He’s a triumph of substance over form and we should celebrate him for that. Indeed, substance over form is one of your main axioms for tax compliance etc is it not?
That’s not it. The figures you cite for trading volumes – around £3trillion – relate to actual share purchases and not contracts for difference. Stamp duty is only charged on a fraction of this trading. Understanding the history and experience of stamp duty is essential to any realistic FTT proposal.
Relocation is a red herring. Most of the City’s business is foreign banks/companies coming here to do business. They could write derivatives etc anywhere in the world, but choose to do so in the UK. If you impose a tax that has economic significance on those transactions then they will choose to go elsewhere. Anti-avoidance cannot in principle prevent this.
@Marc Daniels
a) Tell more then. I’m willing to note what I’ve missed – if I have. No one is perfect. I’m not
b) You miss the point – they can’t relocate. Markets only work in clusters – i.e. when there is a market place. There is nowhere else in this time zone but London to trade for that reason. The tax would remain a cost worth paying – because London adds more value – and will for a long time after any tax is imposed
@roger rabbit
Didn’t I say that?
I hoped that was what I meant
What you are missing:
1. Those trillion dollar figures are gross trading volumes. Every time adjusts his position which he may do several times an hour he adds to the gross trading volumes but the bank’s net exposure hardly changes and is a much smaller figure.
2. The increase in trading vlumes is largely a function of increased automated trading, which in turn simply means that traders are trading with finer spreads. Automated trading doesn’t mean that banks are taking wild punts on the whim of a computer. It simply means that they execute trades automatically when they see a market bid or offer that they want to accept, which they do more often when there are finer spreads.
3. Having a greater proportion of the business in London means that there are more profits and more salaries/bonuses paid in London, so the Chancellor gets his share of the profits that way.
4. Imposing a Tobin tax in the UK would move all of that business offshore as quickly as it takes to set up a rates data feed and trading desk. The large banks pass their forex trading book from London to New York, to Tokyo and back to London every day. Passing it to Zurich, Paris or Frankfurst would actually be a better fit time wise than London.
5. No banks lost money in the financial crisis because of their forex trading.
Apologies in advance for the rather long post, but I believe that there are a number of issues that the proponents of the tax have never addressed.
While 37% of global FX trading may take place in London, only a relatively small fraction of this involves Sterling. So while trading may take place in London, the overwhelming majority of transactions clear and/or settle through the various currencies’ central banking systems outside the UK. That alone makes it impossible for the UK to capture all but a very small minority of the flows without the participation of foreign jurisdictions.
Since 85% of all trading involves the Dollar, the problem could be solved if the US were on board. But the Obama administration is not interested in this tax, and neither are the Republicans who will take over Congress in 9 weeks (this is an understatement).
It is of course possible to tax transactions in Sterling unilaterally, but then the revenues raised would be relatively small, not least because the tax would reduce the liquidity of the Sterling markets and therefore the potential tax base. Other collateral effects (largely ignored by the proponents of the tax) would be the loss of Sterling’s residual status as a reserve currency, leading to higher borrowing costs across the currency zone.
It is a valid policy choice, but not one that will raise billions for “good” causes, and the incidence of the tax may actually make economically neutral or even harmful.
Similar issues apply to interest rate transactions. While an OTC derivative may be agreed in London, it can be booked through a non-UK entity (and in fact this is what almost always happens for non-Sterling transactions), in which case it will also settle and clear outside of the UK. Unless other jurisdictions co-operate, this makes the tax very easy to avoid.
One could in theory tax unilaterally Sterling rates transactions (just like the Stamp Duty taxes UK trading in shares), but this raises further issues. One is that the revenues raised are likely to be negligible because, whilst the notional volume of interest rates derivatives appears large to uneducated readers, the actual flows are relatively small, since the notional amounts are not exchanged (unlike in a currency transaction) and all agreements allow for the netting off of payables and receivables on each payment date. In an interest swap for instance, an underlying notional of $1 billion may result in payment of a few million Dollars at most. There is a real risk that the cost of designing, implementing and enforcing a narrow tax on Sterling rates derivatives will exceed the revenues it generates.
The second issue is that the greatest losers of the tax will be Sterling borrowers and investors. In particular, much of the activity in the swaps market is related to mortgage lending, and the cost of the tax, both direct and indirect in the form of reduced liquidity, will be passed, in way or another, to mortgage borrowers. This cannot be the intention.
On the issue of relocation, the proponents of the tax have to be realistic about London’s status as a financial centre. As demonstrated by the result of the UK bonus tax (more than half of which was contributed by US firms), the London financial services industry is dominated by American institutions, owned, funded, controlled and staffed in majority by US parties. It would be extremely na?Øve to assume that these banks and hedge funds, their shareholders, investors and managers would simply sit around and accept the tax without considering their options, especially considering they will be encouraged by the US authorities hostility to the tax. It may also be worth remembering that much of the euromarket activity at the core of London’s financial services industry only came about as a result of ill-conceived US tax policies.
Views welcome.
@Ted G.
You’re wrong
And the IMF is beginning to believe you’re wrong
http://www.taxresearch.org.uk/Blog/2010/09/05/the-imf-moves-towards-a-robin-hood-tax/
Richard,
It looks like Ted agrees with you when he writes “It [the tax] is a valid policy choice, but not one that will raise billions for “good” causes, and the incidence of the tax may actually make economically neutral or even harmful”
What mkes him wrong?
In addition, he makes a number of very pertinent observations which the proponents of the tax would do well to address.
Since you have opened another thread on this topic, it may be better to continue this conversation over there.
@Jason
I’ve re-read Ted
One sentence out of context appears logical
Let’s leave the rest, shall we?
The rest makes quite a lot of sesnse as well. It would be interesting to hear on basis you think it is misguided.
The most objectioable bit is about American dominance of the City, although he has a point when saying that over half of the bonus tax was paid by US institutions.
Thank you. took a while to write this.
Why? Surely proponebts of the tax have thought of these issues.
@Ted G.
Why?
Because you added nothing to debate
But yo do waste my time
Which is why I’ll be applying the moderation policy to you strictly from now on
“Because you added nothing to debate”
Please register my respectful disagreement.
Ted has made a number of very pertinent observations and raised some very real issues.
It would be of great interest to many to understand how you, as a proponent of this tax, are planning to address them.
@Jason
I’m not
Because they’ve all been addressed before here and elsewhere
And I feel no obligation to waste my time reiterating what’s already been written
Put simply: I have better things to do and better people to engage with
“And I feel no obligation to waste my time reiterating what’s already been written
Put simply: I have better things to do and better people to engage with”
This is a very rude answer to what was a gracious suggestion. My you should indeed be left to your better people.
@Jason
It may have been a gracious question
It feels like you’re wasting my time
Answers to these points are available on this site and elsewhere
And because I run a blog I ma not beholden to be a personal advice line – or to spend my day doing your research
Sorry if you thought I was
But now you know
This comment has been deleted. It failed the moderation policy noted here. http://www.taxresearch.org.uk/Blog/comments/. The editor’s decision on this matter is final.