M Allen Banking Environment and Financial Sector Levies

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Banking Environment and

Financial Sector LeviesSeminar on Value Based Management in Financial Institutions

Gdask, June 17, 2010

Mark Allen

Senior IMF Resident Representative for

Central and Eastern Europe


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Financial markets recovered faster than

expecteduntil recentlySelected IBoxx Spreads 1/

(all maturities, basis points)

Euro Area Equity Markets

( Jan 1, 2007 = 100)

1/ IBoxx corporate bond rates over German benchmark bond yields.2007 2008 2009 2007 2008 2009

Source: Bloomberg40

50

60

70

80

90

100

110

120

S&P index

FTSE index

Euro Stoxx 50

20100

100

200

300

400

500

600

700

800 A ratedAA rated

AAA rated

All maturities

BBB rated

2010


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Most financial markets are returning to normal

Emerging Markets

Prime RMBS

Corporate credit

Commercial MBS

Financial Institution

Money markets

Jan-07Source: Global Financial Stability Report, April 2010

Jan-10 Jan-08 Jan-09

Subprime RMBS

Heat map


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0

2

4

6

8

10

1214

16

18

20

0

200

400

600

800

1000

United States Euro Area UnitedKingdom Other MatureEurope Asia

Expected additional writedowns / loss provisions (left scale)

Realized writedowns / loss provisions (left scale)

Tier1/RWA capital ratio end-2009 (right scale)

Implied cumulative loss rate (right scale)

Bank balance sheets have strengthened

(billions of US$)


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but funding maturities have shortened

Mature Market Bank Bond Maturities

(Percentage of initial stock)

0

24

6

8

10

12

14

16

18

1 2 3 4 5 6 7 8 9 10 11 12 13

6/30/2007 1/1/2010

YearsSource: Global Financial Stability Report, April 2010


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Private Credit Growth

(annualized percent change of 3mma over previous 3mma)

Source: Bank of England; European Central Bank; the Federal Reserve Board; IMF IFS

and credit supply remains restrained.

-80

-60

-40-20

0

20

40

6080

100

120

United States Euro Area United Kingdom

Central and Eastern Europe Latin America Developing Asia


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EM mutual funds are flush with cash

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0

20

40

60

80

Cumulative Net Flows to EM Mutual Funds

(Billions of USD)

Source: Global Financial Stability Report, April 2010


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0

20

40

60

80

100

120

140

2006 2007 2008 2009 2010

Middle East / Africa

Developing Europe

Latin America

Emerging Asia

Emerging Market External Bond and Equity Issuance

(Billions of USD)

..and capital flows to EMs have resumed.

Source: World Economic Outlook, April 2010


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Source: Bank for International Settlements

External positions of reporting banks

(billions of USD, estimated exchange rate adjusted changes)

-40000

-30000

-20000

-10000

0

10000

20000

30000

40000

50000

60000 Other Emerging EuropeBaltics

NMS2

CEE3

The banking system is no longer

providing net resources to CEE


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but FDI is still positive.

Source: Haver Anal tics IMF International Financial Statistics

Net capital flows to CEE

(billions of USD)

-15

-10

-5

0

5

10

15

20

25 Other InvestmentFDI

Portfolio

Total


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The crisis is becoming one of sovereign

finances.

0

50

100

150

200

250

USA

Germany

Italy

UKJapan

Source: Bloomberg

I.Financial crisis

Buildup

II.Systemicoutbreak

III.Systemicresponse

IV.Sovereign

Crisis?

The Four Phases of the Crisis

(10-yr sovereign swap spreads, percent)


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Fiscal deterioration in some countries

has become evident...

0

20

40

60

80

100

120

1995 2000 2005 2010 2015

Advancedeconomies

Emerging andDeveloping economies

Public Debt

(Percentage of GDP)

Source: World Economic Outlook, April 2010


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and sovereign borrowing has increased

sharply.

0

24

6

8

10

12

14

16

Net Borrowing Needs

(percentage of GDP)

2003-08 average 2009 2010 (est) 2011 (est)

United States Euro Area United Kingdom



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Some Government borrowing cost are rising.

10-year government bond yields

Source: Bloomberg

2

4

6

8

10

12

14Czech Rep. Hungary Poland

Germany Greece

CEE b k h l


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CEE banks have complex

interconnections

2008-2009Concern

E b k l i h i h l


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European banks claims on the peripheral

eurozone are substantial

Source:BIS

USD 100 bln


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The direction of concern has changed

2010

Concern


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Bank creditworthiness is connected with

that of the sovereign.

-50

0

50

100

150

200

0 50 100 150 200 250 300

Norway

Portugal

Greece

Italy

Switzerland

Spain

United Kingdom

France

Denmark

AustriaGermany

BelgiumNetherlands

Sweden

Ireland

Percent change in sovereign CDS

October 2009 to March 2010

Average

percentchange

inlocalsenior

financialCD

S



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Taxing the Financial Sector

A fair and substantial contribution

from financial sector

Various motives G20 asked IMF to study issue

Objectives:

reduce systemic risk

tax rents in the financial sector


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Financial Stability Contribution (FSC)

Direct support to financial sector 2.5% ofGDP in advanced G-20

Guarantees averaged 25% of GDP

FSC would cover this as business cost Levy on some on and off balance sheet

items to encourage risk reduction

Permanent and for all financial institutions Could feed resolution fund or general

revenues


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Financial Activities Tax (FAT)

FAT tax base

Profits and remunerationpaid by financial institutions.

Remuneration above somelevel, and abnormal profits

Only profits above somehighly abnormal level.

Pros and Cons

Similar to VAT and correctundertaxation of financial

services Proxy for a taxes on return

above competitive levels(rents).

Correct for any tendency toexcessive risk-taking fromunderestimating outcomes inbad times.


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Financial Transactions Tax (FTT)

FTT paid every time a financialinstrument or foreign currency isbought or sold.

Some forms of FTT may be feasible Poor way to meet objectives of

reducing systemic risk and taxing rents.

Incidence may be on consumer.

Easier to circumvent than FSC or FAT


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Fate of the Proposals

Leaked at April deputies meeting

Objections from Canada, Japan andemerging markets at June G20 meeting

US and EU still plan to go ahead withlevies

New channel for arbitrage created?


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The impossible trinity

Financial Stability

Integration/Free trade Sovereignty

After Schoemaker


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Thank you!

Documents

M Allen Banking Environment and Financial Sector Levies