Intelligent transaction tax could help reduce systemic risk in financial networks
A tax on individual transactions between financial institutions—based on the level of systemic risk that each transaction adds to the system—could essentially eliminate the risk of future collapse of the financial system, according to a new study recently published in the journal Quantitative Finance. It relies on an analysis of the networks of the banking system, using central bank data from Austria.
“When banks collapse, it costs a lot to bail them out, and that money usually comes from the public, from taxpayers” explains IIASA researcher Stefan Thurner, who coauthored the study with IIASA researcher Sebastian Poledna. The proposed tax would go into a government fund which could be used to bail out a struggling bank, for example. “You could also consider it a form of systemic risk insurance,” says Thurner.
Financial institutions are linked by multiple types of transactions, which Thurner and Poledna have modeled in a detailed network analysis. These transactions include deposits and loans between financial institutions. The study is the first to quantify the systemic risk that individual transactions add to the system.
‘’Since the international financial crisis in 2007 and 2008, policymakers have been discussing new ways to regulate the system in order to help avoid a repeat scenario.
The new study provides just that,” says Poledna. While introducing such a tax would require some work, the researchers argue that the data are there and the technical effort required for implementation is not overwhelming. Thurner has already presented the work to interested policymakers, supervisors, and central banks in the EU and Mexico.
“There’s currently a lot of discussion about a Tobin tax in the European Union, but the version they are proposing would tax every transaction at a flat rate. The tax we are proposing would not have to be large, in order to act as an incentive scheme for avoiding transactions that would be the most harmful for the system—banks would try to avoid transactions that generate that risk,” says Thurner.
Poledna S, Thurner S (2016). Elimination of systemic risk in financial networks by means of a systemic risk transaction tax. Quantitative Finance doi:10.1080/14697688.2016.1156146
All news from this category: Business and Finance
This area provides up-to-date and interesting developments from the world of business, economics and finance.
A wealth of information is available on topics ranging from stock markets, consumer climate, labor market policies, bond markets, foreign trade and interest rate trends to stock exchange news and economic forecasts.
A little friction goes a long way toward stronger nanotube fibers
Rice model may lead to better materials for aerospace, automotive, medical applications. Carbon nanotube fibers are not nearly as strong as the nanotubes they contain, but Rice University researchers are…
Light-induced twisting of Weyl nodes switches on giant electron current
Scientists at the U.S. Department of Energy’s Ames Laboratory and collaborators at Brookhaven National Laboratory and the University of Alabama at Birmingham have discovered a new light-induced switch that twists…
Acidification impedes shell development of plankton off the US West Coast
Shelled pteropods, microscopic free-swimming sea snails, are widely regarded as indicators for ocean acidification because research has shown that their fragile shells are vulnerable to increasing ocean acidity. A new…