So, this could be a problem with the Robin Hood Tax

The International Capital Market Association says it would devastate the repo market, a vast pawn shop that allows banks to raise funds quickly and easily by pledging assets. It expects transactions to plunge by two-thirds overnight.

Even that may be optimistic. Gabriele Frediani from the electronic market MTS said trades would collapse by 99pc. “The Repo market would disappear overnight,” he said.

The repo market – $8 trillion in the EU and US combined – is a crucial lubricant of global finance. It was a failure of the repo system after the Lehman crash that set off the downward spiral in 2008. \”The collapse of the repo market contributed to a liquidity shock that had far-reaching consequences for the global financial system,\” said an IMF study.

ICMA says that much of the current collateral system for banks will \”cease to be viable\” under the current plan. Investors will be driven into \”unsecured deposits\” not covered by the tax. The European Central Bank would struggle to conduct monetary policy.

I know, roughly that is, what the repo market is. I do wonder though whether any of those who support the RHT do.

Back when I wrote a report on the RHT I pointed to the Interbank or overnight market a being threatened with shut down as a result of the tax. The tax itself would be more than the interest to be earned. Seems to same is true of the repo market but squared: as it has become obvious that they way it is calculated is that every step and stage pays it. Even something as simple as an overnight loan or repo, pays it both coming and going. with no market maker or broker exemptions.

Between the two of them these are the two main sources of short term liquidity in the markets. At least I\’m told so.

Shutting them down does seem a little odd really.

15 thoughts on “So, this could be a problem with the Robin Hood Tax”

  1. Surreptitious Evil

    I suspect those campaigning for the RHT would see this as a feature not a bug. Because they’re largely the same people who are campaigning for “burn the banksters”, green taxes on everything, zero CO2 emissions by 2020 etc, etc, etc.

    Hell, even the “Sustainable Population Trust” would be happy.

  2. May be a little to late by then.

    Am I to understand that the English Literature graduates or PPE experts are lacking a little in knowledge of the area in which they are legislating?

  3. I suspect there are several ulterior motives behind this spectacurlarly badly thought out plan – not simply one of trying to raise centralised revenue for the EC to spend as it sees fit, giving themselves a revenue stream independent of state governments.

    Firstly, I believe at least some of the idea is to try and force short bond positions out of the market and thus yields on government bonds lower. Traders who are short bonds still have to deliver them, so turn to the repo market to borrow them for delivery. These repo trades are typically a week in duration (as the cash collateral makes it too expensive to do for longer durations). Charging a large tax on repo weekly makes it uneconomical to be short.

    The problem is, it alos forces leveraged long positions out of the market for exactly the same reason. A leveraged long is someone who buys the bond, but doesn’t have the cash to pay for it, so lends the bond out into the repo market to borrow cash to do so. Typcially it is a carry strategy, hoping to make money on the higher yielding bond whilst paying low short end rates.
    leveraged long positions vastly outweigh short positions, and account for a significant bond holdings.

    Net effect of the repo tax is likely to force bonds to sell off long term, rather than for yields to go lower.

    Then we can turn to the effect a repo tax will have on the mortgage market. Lots of pro-FTT types have said that an FTT won’t add any significant cost to a mortgage.

    This is simply nonsense. A (25y say…) mortgage is funded by a bank through the money markets, including the repo market. When a bank lends against a mortgage, it doesn’t have all the money just sitting there, it has to go and borrow it short term to fund the long term loan. This happens in the depo and repo markets, usually of terms out from a day to a month.

    If we (very conservatively) assume that the bank borrows on a 3 month basis, but gets taxed 0.1% per transaction, we can estimate the affecct it will have on the cost of a mortage (given the cost will be passed from bank to customer). At a minimum it will add about 2% to the cost….if not a lot more.

    Making repo expensive means that the banks, holding large amounts of government bonds on their balance sheets can’t lend them out via repo for cash….reducing the amount of credit available, making cash more expensive and reducing the value of those government bonds n comparison to cash (they are now seen as effectively interchangeable thanks to the repo market).

    The end result of this means that interbank lending will dry up massively….and banks will only be able to go to the central banks (like the ECB) to borrow cash. This means the ECB becomes the main lender for the whole system, allowing them to control the money supply, both in terms of cost and also who recieves it and also be able to collect large taxes at source.

    All in all, its an extremely scary power grab and tool to move to ever more centralised european control of finance.

  4. @5 Tyler

    There might have been several lefties reading this. You will have bored them stupid and they’ll all have gone back now to writing anti-Thatcher posts.
    I enjoyed it, found it interesting and helpful. Thanks.

  5. Hardly worth fussing about. All that is needed is an alternative form of lending that gives the same level of security as a repo without falling into the tax. As investment banking problems go, I’d give this a difficulty rating of about 2/10.

  6. Surreptitious Evil

    Alex,

    That suggests an unwarranted expectation of a lack of goalpost shifting on behalf of both the campaigners and the Eurocrats. This is being implemented for the good of the citizens of the EU.

    No matter how much the evil capitalist baby-eating banksters insist on “the rule of law”, it won’t be allowed to escape them from paying their dues under the democratic mandate (sic) for ‘fair tax’.

  7. Am I right in understanding that Italy has for some time had a FTT but has made absolutely certain that it didn’t apply to gov’t bonds? I read somewhere the rationale was that it would cause a terrible increase in the costs of gov’t borrowing.
    If I did read that right, then there shouldn’t be any further discussion needed really should there.

  8. Alex is right, a new market will emerge, but remember, the dislocation to liquidity surrounding lehman only lasted a month, but caused a masive disruption in the physical economy as liquidity dried up. These fools in the EU, blinkered by a combination of hatred of the city of London and greed at all the tax revenue they have been promised are an enormous proble. One hope might be that, re-animated by the tributes to Maggie, David Cameron stands up and says, ” sorry, this is a stupid tax and we refuse to collect it. Sue me”. OK, that’s fanciful, but someone really needs to stand up to these lunatics.

  9. Surreptitious Evil

    Hasn’t the enormously foreheaded one said that it is a stupid idea and, never mind not collecting it, it simply won’t be implemented?

    Not that that means he won’t do a u-turn on a ha’penny as usual.

  10. Damn you, Mark T, putting a quote in there…

    As I was saying… First finish the quote then add:

    That reminds me of the favourite word of these last few days: “divisive.” We can’t be divisive and just tell ’em to get lost now, can we?

    Same with the muslims. We should publish any cartoon we want, and if they don’t like it they can go somewhere it’s prohibited.

  11. Surreptitious Evil

    MarkT,

    My point wasn’t that the pointy heads in the banks wouldn’t be able to engineer something that avoided the initial money-grab, but that the empty heads in the Berlaymont would simply embrace and extend any new market.

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