The latest news seems to be that most major governments want a bank tax. The reasons behind this are clear to everyone I’m sure, but they do open the prospect of regulatory arbitrage – a subject that this blog has touched upon in recent months.
The problems with a bank tax are obvious though. Any country that has some semblance of a financial services industry, and chooses not to introduce such a tax, could easily be catapulted into the role of a new global financial centre. The massive sums of money at stake virtually guarantee this.
We often hear of the amazing sums of money being earned by the top hedge fund managers. The ‘poor’ ones only bring in a few million dollars each year. The ‘rich’ ones bring in hundreds of millions of dollars annually (some even earn into the billions per year!). In total, there are hundreds of billions of dollars in annual fees paid to hedge funds. If that is the case, and many of them deliver pretty average returns and so rely on their 2 to 3 percent annual management fee, then a global tax of (lets imagine) 0.5 percent, will be huge.
Who would want to avoid paying that???
And so the global financial centres could be crushed by the wrong tax legislation. That would prove to be terrible for London and New York. But possibly less bad for others (perhaps Singapore and Hong Kong for example). My thoughts on this subject in April can be found here.
So the risks are high and as France and Germany push ever harder for this, they risk turning the financial centres of the world upside down. Or perhaps that is the point?