Financial Transaction Tax as an Instrument for Banking Sector Regulation in the EU

Abstract

Abstract. The aim of study "Financial Transaction Tax as an Instrument for Banking Sector Regulation in the EU" is by analyzing scientific literature, as well as statistical data and theoretical framework, to explore the impact of financial transaction tax on banking business in the EU and to offer suggestions for the improvement of the European Union's bank regulatory system. Section I provides an introduction to the necessity of implementation of financial transaction tax as an instrument of banking sector regulation. Section II presents theoretical analysis of regulatory policy of the financial sector. Section III illustrates the financial transaction tax performance analysis within the European Union. Section IV outlines the opportunities for improvement of banking sector regulation and concludes the article.

The Effect of Bank Levy Introduction on Commercial Banks in Europe

“…The main aim of the BL introduction was to change the incentives of banks' management and owners to contribute to systemic risk. However, researchers and experts have also noticed a negative impact of the BL, as it may increase financial transaction costs; reduce the number of transactions and lower transactions value, which can negatively affect bank liquidity; and result in wider interest spreads and higher volatility, as well as a rise in prices of banking services (Huizinga et al 2012;Kol , esn , ika and Dovladbekova 2014). On the other hand, researchers have proven that the bank levy might not decrease banks' profitability, because costs are shifted to customers, or some financial transactions can be transferred to countries in which such taxes do not exist (Albertazzi and Gambacorta 2010;Huizinga et al 2012).…”

“…However, researchers and experts have also revealed a negative impact from the BL, as it has the potential to increase financial transaction costs and contribute to a decline in the number of transactions and in the overall transaction value. This can thereby lead to a decrease in bank liquidity, wider interest spreads, and higher volatility, resulting in a rise in the prices within banking services (Huizinga et al 2012;Kol , esn , ika and Dovladbekova 2014). On the other hand, some researchers claim that the BL does not affect banks' profitability, because costs are shifted to customers, or a financial transaction can be transferred to a country in which such taxes do not exist (Albertazzi and Gambacorta 2010;Huizinga et al 2012).…”

Taxation of the financial sector: Is a bank levy the answer to the financial crisis?

“…He proposed a small transaction tax on all Wall Street transactions in the USA and claimed that an excessively high speculation level is the result of ill-considered actions taken by financial traders. Keynes was concerned about the proportional distribution of financial speculators within the market and the likelihood of their dominance if they remain unchecked [ 52 ].…”

“…Primarily, taxes on financial institutions were introduced to compensate for the consequences of the financial crisis (e.g., [ 70 , 87 ]), followed by the exemption of the majority of financial services from VAT [ 12 , 13 , 52 , 58 , 64 , 78 ]. Taxes on financial institutions were also introduced to increase public revenue (e.g., [ 27 , 58 , 60 ]).…”

“…Countries unwilling to take such measures argue that they would damage the competitiveness of financial institutions, increase prices of financial products and interest on loans and reduce demand for labor in the financial sector [ 53 ]. Opponents argue that such regulations could: have negative institutional consequences for banks, including: dismissal of employees [ 52 , 86 ], increase in transaction costs [ 52 ], decrease in transaction volumes [ 52 , 77 , 88 ]. result in cost shifting by banks, for example: moving operations from the EU to Asian countries [ 61 , 77 , 88 ], distorting activities of international banks [ 43 ].…”