FTSE 100
Dow Jones

Thursday, 12 November 2009

Why the left is too stupid to govern

The TUC has decided that bankers need to be punished, so they have started writing their submission to this year's PBR.

Their idea is simple. Place a 5bp (0.05%) tax on every payment that goes through the Clearing House Automated Payment System (CHAPS). This they confidently assert means that the government will raise £37 billion in taxes.

Problem #1: If they raise that much tax, more than all the UK banks' profits in even the good years, then either the banks will lose capital or they will have to pass the cost onto their customers, probably the latter. If it is the former then the tax is a de facto nationalisation, although even this government says they don't want to be in banking.

Problem #2: A 5 bp tax might not seem very much, but if you are a bank or a big corporation that actively manages its cash, it is a bit of a bummer. If a company moves £100 m to an overnight deposit at 5%, they will earn 5%/365 or about 1.3 bp (£13,000). The trouble is they will pay £50,000 for the transfer, and if they want it back the next day that is another £50,000, compared with the £50 or so it would have cost for the 2 CHAPS transfers. So you can forget about the overnight sterling market, or in fact anything up to 7 days if you want to make a deposit at a profit.

If you are prepared to lock up your money for 30 days it gets better. You only lose 25% of your interest in tax, which kind of wrecks the short term money markets and because of that there is no effective market for 90 day deposits because where does a bank place its money overnight when it is looking for a home for its excess cash if it can't place it all on 3 month deposits? So forget sterling denominated floating rate lending.

In fact forget UK firms keeping their excess cash in sterling or in UK based treasuries. If they want to hedge sterling positions they can do that offshore and in other currencies. In fact there might even be a new dollar or euro denominated market for hedging sterling risks.

Problem #3: And probably the most significant is the fact that most of this tax is premised on the very large size of payments that pass through the system. Many of these payments are gross payments for settlement of margin exposures between banks. The cost of CHAPS is fixed so the banks don't care about the size of the amounts they transfer, but with a change in procedures the amounts could be reduced. For example, assume that the interest swaps desk at RBS holds an in the money cash collateralised swap with Barclays. Barclays are required to post cash with RBS as collateral. At the same time another part of Barclays holds an in the money cash collateralised CDS with RBS. Margin on that is also posted through CHAPS and for ease of administration and general simplicity they are sent gross.

If the cost of the CHAPS transaction became dependent on the amount transmitted, then whichever bank was responsible for the net amount would simply remit that amount under a bilateral netting arrangement and the banks would agree internally about the allocation of payments to cover collateral. That is a bit messy, but worth doing to save most of £30 billion.

Of course we would fully expect the lunatics on the left to then cry "tax avoidance" and then impute a tax on a payment that they consider should have been made but wasn't. At which point we see how pogroms, reigns of terror and great marches get started.


The King of Wrong said...

Totally agree on how ridiculous the proposal is.

Wouldn't it also result in a permenant, near-total drying-up of short-term credit? Or, at least, create a completely insane inversion on the yield curve to cover the costs? For overnight money, 10bp per day has to be a hell of an APR (>40%?) to whack on top of LIBOR!

Alex said...

The likelihood is that it would kill the London or UK banking system and short term deposits would go elsewhere, so short term borrowing would be conducted from euro bank accounts held and cleared in Frankfurt, Paris, Geneva or Brussels.

Not a sheep said...

Alex have you considered that that might the idea behind this plan. To destroy The City so the UK is forever subservient to the EU.

Alex said...

I think it is due more to incompetence than evil. The source of the idea appears to be Richard Murphy of the Tax Justice Network and Guardian tax "expert".

He has an unfortunate attitude to the world in general and banks in particular, but most of all he is very unpleasant to commenters on his blog who disagree with his trenchant views, deleting their comments and sending them emails calling them Nazis etc. Great fun!

He is a tax accountant and clearly understands little about banking.

Steven_L said...

Thanks for this enlightening explanation Alex. In my line of work I know that if something sounds too good to be true it will be.

Curing our budget deficit for a measly 0.05% tax on 'financial transactions' did kind of stike me as fitting neatly in that 'too good to be true' category.

Alex said...

Well the other thing it does is make the shares in banks practically worthless, so the £75 billion we have spend on baks shares can be written off.