As the report notes, the short term alternative of an insurance charge that some promote as an alternative to
financial transaction taxes does not have any of the benefits flowing from adoption of these taxes as noted
above, nor can it raise equivalent revenues. In addition, whilst financial transaction taxes should only eliminate
marginal trades but leave markets intact with ample liquidity, the proposed rate of the US levy at 15 basis
points is well above margins on many of the trades noted in this report and is consequently likely to be
harmful to the operation of some markets.
Oh dear. He seems to think that the insurance levy has anything at all to do with margins on trades.
This is very much arse about tit.
The idea of the insurance levy is that liabilities of banks get taxed. Or rather, pay an insurance fee. So if Bank of Worstall owes $100 billion to other people then Bank of Worstall would pay that 0.015% in an insurance fee.
Size matters as it were. And importantly, those liabilities that are also covered by other insurance schemes, say, deposit insurance up to some fixed level as we\’ve got in the US and UK would be deducted from liabilities before the fee is calculated. So a bank that relies mostly or purely upon individual depositors, who we can assume will mostly be covered by other schemes, will not be paying the further levy while whose relying upon wholesale money markets, which are not covered by other schemes, will be.
All quite sensible really.
However, this is the bit that Ritchie seems not to get. It\’s a fee upon liabilities in aggregate. Not a fee on each liability. To explain: if Bank of Worstall borrows $50 billion from Bank of Ritchie for a week and then pays it back, then borrows $50 billion from Bank of Murphy, pays it back and so on for a year, Bank of Worstall is not paying the fee on 52 times $50 billion. It\’s paying it on the $50 billion.
So the levy has nothing at all to do with margins on what the money is put to use doing. If Bank of Worstall wishes to trade five times an hour in FX with the $50 billion at 0.005 % margins or simply lend the whole lot to GM at 15%, the levy makes no difference to that decision at all.
By stating that the levy will close down low margin areas of business Murphy has shown that he doesn\’t understand the basics of what is being suggested. It\’s not levied each time the structure of liabilities changes, it\’s levied on the average amount over the year.