Pigouvian Tax for Banks Overly Reliant on Wholesale Funding?

Économiste Monétaire

This was linked on the Irish Economy blog; quite interesting.

http://www.voxeu.org/index.php?q=node/3901

Why have Canadian banks fared better during the crisis than their OECD peers? This column attributes their stability to their reliance on depository funding rather than more risky wholesale funding. It recommends a Pigouvian tax penalising banks using excessive short-term wholesale funding.

KP81

A tax on the use of hot wholesale money sounds like a no brainer. Why hasn't such a tax been introduced already? A practical way of doing this is to introduce a Tobin tax. I.e. tax on currency exchanges, so as this hot money flows in or out it gets taxed. A level of 0.01% should be enough to put the speculators off and create a more stable market. Unfortunately it seems the Government are doing all they can to restore the wholesale funding interbank market, not reduce reliance on it. This mantra that we need to get credit flowing again is crazy. Credit supply has to be reduced to levels where amounts lent are tied closely to the retail banks deposit base.

Économiste Monétaire

KP81 wrote: »

A tax on the use of hot wholesale money sounds like a no brainer. Why hasn't such a tax been introduced already? A practical way of doing this is to introduce a Tobin tax. I.e. tax on currency exchanges, so as this hot money flows in or out it gets taxed. A level of 0.01% should be enough to put the speculators off and create a more stable market.

Sarkozy to press for 'Tobin Tax'.

A slightly broader approach than a tax on forex. I don't know of any previous implementation of a Tobin Tax.

I read this a few days ago, forgot to post it here; How to tax banks:

The next question then is how banks should be taxed? Many proposals have been made recently. Some have proposed a Tobin tax. The problems with this tax are many. First, it does not address the issue raised here of how to tax banks. The Tobin tax is a tax on financial transactions involving many non-banks. As originally conceived by Tobin it would only tax foreign exchange rate transactions. Second, the objective of this tax is to stabilize financial markets by making speculators pay. But this is unlikely to work well. The Tobin tax rate will by necessity have to be relatively small. In his original proposal Tobin had in mind a tax rate of 0.5% or less. This is unlikely to deter speculators. In order to have such a deterrent effect, much larger tax rates would be necessary, but then financial markets would also be thinner. There is no evidence that thinner financial markets produce less price volatility. On the contrary prices tend to be more volatile in thin financial markets.

silverharp

it seems more like a tax for tax sake. It would seem preferable to seperate prop trading from commercial banking or increase margin requirements so that bank reserves are not used to fund the activity.