Friday, 21 August 2015

Yes, but that was the whole point.

From The Guardian:

Responding to complaints from banks that the levy has been raised too often and without warning, Osborne set out a timetable of reductions from 0.21% to 0.18% from January 2016 and 0.17% from January 2017, before reaching 0.10% from January 2021. The levy had been based on global balance sheets, but would from 2021 be focused only on their UK operations.

The bank asset levy is a good tax, so scaling it back is a bad idea but restricting it to UK assets only is a very sensible idea.

The chancellor’s move to scale back the levy, which has raised £8bn since 2010, came alongside a new 8% surcharge on bank profits. Analysts estimated the changes would save major international banks such as HSBC and Standard Chartered almost £1bn in tax a year.

So they are swapping a good tax for a less-good tax. Bad idea.

But in the grander scheme of things, so what? Five years ago, UK corporation tax was 28%; UK banks will now pay 20% normal corporation tax plus 8% surcharge = 28%, so the clock has just been put back five years.

“The proposed changes to the bank levy and introduction of the tax surcharge on banking companies announced in last month’s budget may benefit UK headquartered international banks but will have a disproportionate effect on building societies such as Nationwide,” Beale said.

True. But that is the whole point. If they had done the sensible thing and based the original bank asset levy on UK assets only at a higher rate, this would come to the same thing.

“This represents a missed opportunity to support diversity by acknowledging that building societies are different to banks and to recognise the contribution Nationwide and other mutuals make by lending to the UK economy, and the housing market in particular.”

I read as far as "support diversity". Special pleading. Ignore.

Killer punch line:

The building society said that the impact of the changes to the banking levy and the introduction of a tax surcharge announced in the budget will cost £300m over the next five years. “This is equivalent to the capital required to support about £10bn of lending,” a statement said.

If true, which is questionable, then this is A Very Good Thing indeed, because all that extra lending would just go into higher land prices i.e. transfer wealth from younger buyers to land owners.


James Higham said...

There is such a thing as a good tax?

Random said...

MW, what is your view on MMT bank reforms
There is a good description of it from Neil Wilson
"It is very difficult to get your head around. It's also very difficult to describe an asynchronous process like bank lending in words, or even pictures. You really need a video. Once you see the thing moving it's pretty obvious what is going on.

Firstly a bank creates a loan. So the loan is to person A, and firstly the deposit is to person A as well. At that point the bank is still fine and still fully funded.

What happens then though is that person A wants to pay person B.

If person B is at the same bank, then there is no problem. The deposit is switched to person B and the bank is still fully funded.

The fun starts when person B is at another bank.

What has to happen that is that bank 2 has to take over the deposit in bank 1 from person A. That increases the assets of bank 2 which then creates a new deposit for person B.

That's how payment works. Somebody has to take the place of the original depositor in the source bank before you can create anything in the target bank.

Of course at that point bank 2 is taking a risk on bank 1 and will expect to be paid by bank 1 an interest rate to compensate for that risk.

And it also means that if bank 2 isn't prepared to take a risk on bank 1, that nobody in bank 1 can pay anybody in bank 2.

It's this latter point that caused the creation of central banks - to make sure that the payment system clears. The theory being that all the banks trust the central bank 'in the last resort' and therefore the central bank can ensure payments always clear.

So the cost of funding is really the payments bank make so they can be part of a payment clearing system.

Central banks can then add regulations and drains, reserve ratios, capital ratios, discount windows and all sorts of other things to increase the cost of funding. This is 'discipline on the liability side' to try and limit what banks lend for. It doesn't really work as we saw in 2008 - because the first thing that fails is the payment system.

MMT suggests that this is counterproductive and that the central bank should just provide the liabilities necessary at no cost to ensure the payment system clear. Instead banks should be 'disciplined on the asset side', i.e. specific regulations as to what sort of loans a bank can make.

This description is somewhat simplified (I didn't discuss equity and capital for example), but I hope it gets over the essence of what is going on. BoE doesn't provide reserves when commercial loans are made. They provide reserves as loans to the commercial banks at a high price with quite a lot of restrictions to encourage banks to borrow from each other, as described above, first."

Random said...

How would YPP regulate banks? Will it be on the asset side (loans) like MMTers suggest?

Random said...

Also, IMV I don't think Tim Worstall really understands banking and MMT, as seen from his article:
Perhaps you could have a little chat to him :)

Mark Wadsworth said...

JH, yes of course. A bad tax makes things worse, a tax which makes things better is a good tax.

R. LVT and bank asset tax will sort them out. And no bank to bank lending. See our manifesto page.

Bayard said...

We are starting to see the extent to which the Lib Dems held back the Tories' cronyism.

R, what happens if person B thinks the whole banking and credit system is about to go tits up, takes the payment in cash and hides it under the mattress?

Mark Wadsworth said...

R, actually I read both of those articles and while not perfect they are reasonably correct, They are still making it seem more complicated than it is.

B, in that case nothing happens. Why would it? Govt just prints enough cash for everybody's deposit to be paid, lends it to the banks and the banks dole it out. So instead of banks owing depositors money, they owe the government money.

Random said...

B, the important point in banking is that you *cannot* withdraw a deposit from a bank unless somebody takes your place as the depositor with the bank. Cash withdrawals work by the bank giving you a receipt from the central bank and chalking up a liability to the central bank. Normally that liability to the central bank is written off against assets held at the central bank (reserves)
So if liquidity dries up in the payment system, you're stuck with a deposit at the bank and all you can do is transfer that deposit to somebody else at the same bank.
That's why maintaining the payment system factors so high in the MMT analysis. Generally that is what a functional economy wants to achieve.
If the bank is insolvent it goes bust and loses its lending license.

Random said...

Also, the amount of cash withdrawn stays roughly constant with no major jumps.
The bigger problem is we are in the EU and they have cut deposit insurance.

Ralph Musgrave said...


Your ideas on MMT and bank reform are completely garbled and muddled far as I can see. First MMTers are not into bank reform in any big way (though Warren Mosler who is a leading MMTer and a banker did have an article in Huffington on the subject). I'm a keen MMTer. I been leaving comments on MMT blogs at the rate of about one a day for the last five years. I think I know what MMTers think. And they are not into bank reform in a big way.

In contrast, the New Economics Foundation, Positive Money and Prof Richard Werner are into much more fundamental bank reforms. See this joint work of theirs:

Ralph Musgrave said...


One silly aspect of the move towards a bank levy based on profits is that it’s PRECISELY the banks making a profit which not the problem. I.e. if banks were charged for the risks they pose to the country (i.e. the possibility of collapse), it’s the loss makers and “break evens” who ought to pay a relatively high levy.

Of course that would drive a failing bank into failure even more quickly, but that’s just tough: deposit insurance or any other type of insurance ought to reflect the risk.

Mark Wadsworth said...

Rm, yes, more good points.

Random said...

MW, Richard Murphy says his supports LVT in latest comment when I asking him about it. Commenter Bob
RM, we can ALL agree on Mitchell/Mosler reforms, the question is whether further reforms are needed. MMT is agnostic on full reserve that I know you like.

Random said...

Bill Mitchell:
"In that regard, the banks:
should only be permitted to lend directly to borrowers. All loans would have to be shown and kept on their balance sheets. This would stop all third-party commission deals which might involve banks acting as “brokers” and on-selling loans or other financial assets for profit.
should not be allowed to accept any financial asset as collateral to support loans. The collateral should be the estimated value of the income stream on the asset for which the loan is being advanced. This will force banks to appraise the credit risk more fully.
should be prevented from having “off-balance sheet” assets, such as finance company arms which can evade regulation.
should never be allowed to trade in credit default insurance. This is related to whom should price risk.
should be restricted to the facilitation of loans and not engage in any other commercial activity.
So this is not a full-reserve system. The government can always dampen demand for credit by increasing the price of reserves and/or raising taxes/cutting spending.
The issue then is to examine what risk-taking behaviour is worth keeping as legal activity. I would ban all financial risk-taking behaviour that does not advance public purpose (which is most of it).
I would legislate against derivatives trading other than that which can be shown to be beneficial to the stability of the real economy."
Agree/Disagree with bits of this?

Bayard said...

"Govt just prints enough cash for everybody's deposit to be paid, lends it to the banks and the banks dole it out."

What about in Scotland, where the banks print their own money?

Random said...

Another big thing : ban lending for currency settlement especially shorts and especially in your own currency.
Bayard, I don't know. I'm sure it all works out fine.

Mark Wadsworth said...

R, yes I know.

B, in that case it doesn't make any difference.

Bayard said...

"Of course at that point bank 2 is taking a risk on bank 1 and will expect to be paid by bank 1 an interest rate to compensate for that risk."

? Bank 1 has a loan, which Person A is paying interest on. Bank 2 has a deposit, on which they are paying interest to Person B. Let's say this was achieved through the medium of Person A withdrawing cash and giving the cash to Person B, who deposited it in Bank 2. Where is the connection between the two banks? How does Bank 1 even know where the cash has gone and why should it be different if no cash was involved? it's the same transaction, after all.

Random said...

Bayard, reserves (settlement balances) are moved. The interbank market is where banks with excess reserves/vault cash lent to banks short of reserves.
MMT just gets rid of that and have the central bank lend reserves.

Random said...

"Similarly, private issuers of IOUs also promise to accept their own liabilities. For example, if a household has a loan with its bank, it can always pay principal and interest on the loan by writing a check on its deposit account at the bank. Indeed, all modern banking systems operate a check clearing facility so that each bank accepts checks drawn on all other banks in the country. This allows anyone with a debt due to any bank in the country to present a check drawn on any other bank in the country for payment of the debt. The check clearing facility then operates to settle accounts among the banks. The important point is that banks accept their own liabilities (checks drawn on deposits) in payments on debts due to banks (the loans banks have made), just as governments accept their own liabilities (currency) in payments on debts due to government (tax liabilities).

Leveraging. There is one big difference between government and banks, however. Banks often do promise to convert their liabilities to something. You can present a check to your bank for payment in currency, what is normally called “cashing a check”, or you can simply withdraw cash at the Automatic Teller Machine (ATM) from one of your bank accounts. In either case, the bank IOU is converted to a government IOU. Banks normally promise to make these conversions either “on demand” (in the case of “demand deposits”, which are normal checking accounts) or after a specified time period (in the case of “time deposits”, including savings accounts and certificates of deposits, known as CDs—perhaps with a penalty for early withdrawal).

Banks hold a relatively small amount of currency in their vaults to handle these conversions; if they need more, they ask the central bank to send an armoured truck. Banks don’t want to keep a lot of cash on hand, nor do they need to so in normal circumstances. Lots of cash could increase the attractiveness to bank robbers, but the main reason for minimizing holdings is because it is costly to hold currency. The most obvious cost is the vault and the security guards, however, more important to banks is that holding reserves of currency does not earn profits. Banks would rather hold loans as assets, because debtors pay interest on these loans. For this reason, banks leverage their currency reserves, holding a very tiny fraction of their assets in the form of reserves against their deposit liabilities.

So long as only a small percentage of their depositors try to convert deposits to cash on any given day, this is not a problem. However, in the case of a bank run in which a large number of depositors tries to convert on the same day, the bank will have to obtain currency from the central bank. This can even lead to a lender of last resort action by the central bank that lends currency reserves to a bank facing a run. In such an intervention, the central bank lends its own IOUs to the banks in exchange for their IOU—the bank gets a reserve credit from the central bank (an asset for the bank) and the central bank holds the bank’s IOU as an asset. When cash is withdrawn from the bank, its reserves at the central bank are debited, and the bank debit’s the depositor’s account at the bank. The cash held by the depositor is the central bank’s liability, offset by the bank’s liability to the central bank."
Bayard, you may want to read from the MMT Primer:

Lola said...

R. Rule of thumb. Anything that takes more than one paragraph to explain is bullocks. E.g. Mmt

Random said...

L, I have appeared to have gone of on a tangent.
"Where is the connection between the two banks? How does Bank 1 even know where the cash has gone and why should it be different if no cash was involved?"
One bank is short of reserves and one has excess.

Random said...

L, you should see some govt documentation. They explain things in the most convoluted way possible.

Bayard said...

"One bank is short of reserves and one has excess".

That answer suggests that Bank 2 knows that some other bank must owe them money, but not which bank. Short of ringing around, how does Bank 2 find out in order to make the judgement at this point:

"And it also means that if bank 2 isn't prepared to take a risk on bank 1, that nobody in bank 1 can pay anybody in bank 2."?

Random said...

Bayard, its just a market.

Lola said...

R. I know ALL about government documentation. I run an FS business. The FCA rule book has over one million paragraphs - no-one has any clue what's in it.

Bayard said...

L, everything is in it. That's so that they always have an excuse to haul you in if you upset the Big Boys.