M Allen Banking Environment and Financial Sector Levies
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Transcript of M Allen Banking Environment and Financial Sector Levies
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Banking Environment and
Financial Sector LeviesSeminar on Value Based Management in Financial Institutions
Gdask, June 17, 2010
Mark Allen
Senior IMF Resident Representative for
Central and Eastern Europe
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Financial markets recovered faster than
expecteduntil recentlySelected IBoxx Spreads 1/
(all maturities, basis points)
Euro Area Equity Markets
( Jan 1, 2007 = 100)
1/ IBoxx corporate bond rates over German benchmark bond yields.2007 2008 2009 2007 2008 2009
Source: Bloomberg40
50
60
70
80
90
100
110
120
S&P index
FTSE index
Euro Stoxx 50
20100
100
200
300
400
500
600
700
800 A ratedAA rated
AAA rated
All maturities
BBB rated
2010
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3
Most financial markets are returning to normal
Emerging Markets
Prime RMBS
Corporate credit
Commercial MBS
Financial Institution
Money markets
Jan-07Source: Global Financial Stability Report, April 2010
Jan-10 Jan-08 Jan-09
Subprime RMBS
Heat map
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4
0
2
4
6
8
10
1214
16
18
20
0
200
400
600
800
1000
United States Euro Area UnitedKingdom Other MatureEurope Asia
Expected additional writedowns / loss provisions (left scale)
Realized writedowns / loss provisions (left scale)
Tier1/RWA capital ratio end-2009 (right scale)
Implied cumulative loss rate (right scale)
Bank balance sheets have strengthened
(billions of US$)
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but funding maturities have shortened
Mature Market Bank Bond Maturities
(Percentage of initial stock)
0
24
6
8
10
12
14
16
18
1 2 3 4 5 6 7 8 9 10 11 12 13
6/30/2007 1/1/2010
YearsSource: Global Financial Stability Report, April 2010
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Private Credit Growth
(annualized percent change of 3mma over previous 3mma)
Source: Bank of England; European Central Bank; the Federal Reserve Board; IMF IFS
and credit supply remains restrained.
-80
-60
-40-20
0
20
40
6080
100
120
United States Euro Area United Kingdom
Central and Eastern Europe Latin America Developing Asia
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EM mutual funds are flush with cash
-20
0
20
40
60
80
Cumulative Net Flows to EM Mutual Funds
(Billions of USD)
Source: Global Financial Stability Report, April 2010
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0
20
40
60
80
100
120
140
2006 2007 2008 2009 2010
Middle East / Africa
Developing Europe
Latin America
Emerging Asia
Emerging Market External Bond and Equity Issuance
(Billions of USD)
..and capital flows to EMs have resumed.
Source: World Economic Outlook, April 2010
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Source: Bank for International Settlements
External positions of reporting banks
(billions of USD, estimated exchange rate adjusted changes)
-40000
-30000
-20000
-10000
0
10000
20000
30000
40000
50000
60000 Other Emerging EuropeBaltics
NMS2
CEE3
The banking system is no longer
providing net resources to CEE
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but FDI is still positive.
Source: Haver Anal tics IMF International Financial Statistics
Net capital flows to CEE
(billions of USD)
-15
-10
-5
0
5
10
15
20
25 Other InvestmentFDI
Portfolio
Total
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The crisis is becoming one of sovereign
finances.
0
50
100
150
200
250
USA
Germany
Italy
UKJapan
Source: Bloomberg
I.Financial crisis
Buildup
II.Systemicoutbreak
III.Systemicresponse
IV.Sovereign
Crisis?
The Four Phases of the Crisis
(10-yr sovereign swap spreads, percent)
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Fiscal deterioration in some countries
has become evident...
0
20
40
60
80
100
120
1995 2000 2005 2010 2015
Advancedeconomies
Emerging andDeveloping economies
Public Debt
(Percentage of GDP)
Source: World Economic Outlook, April 2010
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and sovereign borrowing has increased
sharply.
0
24
6
8
10
12
14
16
Net Borrowing Needs
(percentage of GDP)
2003-08 average 2009 2010 (est) 2011 (est)
United States Euro Area United Kingdom
Source: Global Financial Stability Report, April 2010
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Some Government borrowing cost are rising.
10-year government bond yields
Source: Bloomberg
2
4
6
8
10
12
14Czech Rep. Hungary Poland
Germany Greece
CEE b k h l
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CEE banks have complex
interconnections
2008-2009Concern
E b k l i h i h l
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European banks claims on the peripheral
eurozone are substantial
Source:BIS
USD 100 bln
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The direction of concern has changed
2010
Concern
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Bank creditworthiness is connected with
that of the sovereign.
-50
0
50
100
150
200
0 50 100 150 200 250 300
Norway
Portugal
Greece
Italy
Switzerland
Spain
United Kingdom
France
Denmark
AustriaGermany
BelgiumNetherlands
Sweden
Ireland
Percent change in sovereign CDS
October 2009 to March 2010
Average
percentchange
inlocalsenior
financialCD
S
Source: Global Financial Stability Report, April 2010
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Taxing the Financial Sector
A fair and substantial contribution
from financial sector
Various motives G20 asked IMF to study issue
Objectives:
reduce systemic risk
tax rents in the financial sector
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Financial Stability Contribution (FSC)
Direct support to financial sector 2.5% ofGDP in advanced G-20
Guarantees averaged 25% of GDP
FSC would cover this as business cost Levy on some on and off balance sheet
items to encourage risk reduction
Permanent and for all financial institutions Could feed resolution fund or general
revenues
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Financial Activities Tax (FAT)
FAT tax base
Profits and remunerationpaid by financial institutions.
Remuneration above somelevel, and abnormal profits
Only profits above somehighly abnormal level.
Pros and Cons
Similar to VAT and correctundertaxation of financial
services Proxy for a taxes on return
above competitive levels(rents).
Correct for any tendency toexcessive risk-taking fromunderestimating outcomes inbad times.
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Financial Transactions Tax (FTT)
FTT paid every time a financialinstrument or foreign currency isbought or sold.
Some forms of FTT may be feasible Poor way to meet objectives of
reducing systemic risk and taxing rents.
Incidence may be on consumer.
Easier to circumvent than FSC or FAT
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Fate of the Proposals
Leaked at April deputies meeting
Objections from Canada, Japan andemerging markets at June G20 meeting
US and EU still plan to go ahead withlevies
New channel for arbitrage created?
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The impossible trinity
Financial Stability
Integration/Free trade Sovereignty
After Schoemaker
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Thank you!