2. Risky Operations by Banks as a Fundamental Challenge to Financial Stability

The global financial crisis revealed a systemic deficit of financial regulation on a global scale of all financial institutions, banks above all. This resulted from the long process of the ‘diffusion of power in favor of private actors’ in the financial sector, as Underhill and Zhang put it.Reference Underhill and Zhang ¹ The insufficient regulation at the global level made the system extremely unstable and risky; the uncontrolled exponential growth of the financial sector and its rapid globalization led to the equally rapid increase in endogenous challenges. Some of the main risks included:

• ∙ Too many credits provided, which led to (real estate) bubbles.

• ∙ Over-leveraged banks stimulated not only real estate bubbles, but financial bubbles as well.

• ∙ Highly risky operations. Bank management strategies turned out not to be risk-proof; bankers were systematically taking ungrounded risks that finally proved too large.

• ∙ Too much speculation. New kinds of speculations thrive because of blind spots in international financial legislation.

• ∙ Too much self-generosity. Exorbitant bonus policies not related to long-term stability results for the institutions involved.

• ∙ Derivatives bubble becoming too massive to be managed.

• ∙ Bankers losing interest in crediting real sector companies, comparing higher profits from speculations with modest incomes from the real sector investments.

• ∙ Insufficient connection between the financial sector and industries in general, together with distorted information about the demand and supply of money; lost intermediate links between the banking sector and the real sector.

The list illustrates that most of the risks originated from banking when normally banks are supposed to stimulate growth instead of jeopardizing it.

The core element of financial governance is formed by banking regulations. In theory, banking services are to provide an important link between the financial and the real sector to secure economic growth. In reality, the banking sector has become in itself a source of risks multiplication, including speculative activities resulting in financial ‘bubbles’, increasing the gap between the aforementioned sectors. To sum up, unsecured operations started threatening growth instead of stimulating it, and the intermediator link between the banks and the real sector became less vital. The financial sector itself became a focus of banking activities. It started to live its own life. This has become a challenge for regulators wishing to bring banks closer again to producers in order to stimulate economic growth. Banks, then, appear to be the key factor of financial instability. Thus, the main issue is how to diminish the risks this creates.

Another aspect of the problem is that most risks have a global origin yet are dealt with on a national level. Financial markets became transnational long ago. Still, regulation and supervision remained mostly national, while the whole system was largely uncontrolled at the world level. As a result, the system became either self-regulated or poorly regulated, a situation promoted by the liberalization of national financial markets used as a tool to attract investment.Reference Tsingou ² For this reason, the need for global financial governance remains critical. The attempts to create an independent system of global supervision encounter opposition from nation-states and the banking community – which is interested in ‘carte blanche’. The latter does not support setting up a system of global financial governance.

A better global financial governance means setting up a coherent system of legitimate institutions; using adequate and effective instruments of regulation; relying on efficient methods of monitoring and control over the financial networks, ensuring that the interest of the actors remains high with these measures in place. In this article, the most important of these aspects were analysed to provide the ground for assessing the relative social function of the emerging system.

3. Response of Global Financial Institutions to Catch Up with National Regulatory Inefficiencies

National regulators have close links with the banking community majors; important banks have ‘friends in high places’. It is not easy for a national regulator to introduce new taxation of a banking activity; hence, the need (in theory) to upgrade the role of global institutions to foster financial governance. To what extent do governments contribute to effective regulation at the global level? A study on the OECD countries showed that the majority of governments support global institutions in an effort to foster financial governance.Reference Kroll and Schraad-Tischler ³ Various scholars also support stronger international regulation.Reference James and Patomäk ⁴

Theoretical concepts of global governance are well developed in many works. The link between formal and informal institutions is represented by the concept of major informal institutions (such as G8 and G20) governing either through multilateral formal organizations,Reference Kokotsis ⁵ against themReference Kirton ⁶ or without them.Reference Bayne ⁷ The authors of this article suggest an alternative vision, believing that within the last decade an emerging system of interlinks of different institutions can be defined as players in the orchestra, each having their own part to play, but together making a coordinated effort to play a tune of financial stability. The reason for the new concept becomes clear from what follows.

We are witness to a period in which new financial institutions are set up and new life is brought to traditional ones, resulting in the emergence of an interlinked system of global financial governance. During the few years following the 2008 crisis, a new financial architecture has been built up, and regulatory mechanisms undergo a radical change at the international level. Only a decade ago, authors exploring the financial regulatory system never mentioned a single global supervisory institution in their works. ⁸ Let us look at some of the major avenues of change.

What was the response of the global financial institutions to the most recent financial crisis? First, universal international institutions and forums started to pay more attention to financial stability. The International Monetary Fund, the World Bank, the G-8/7, the World Trade Organization, OECD, regional organizations (especially the EU), intra-regional institutions, such as BRICS, all actively started to introduce various anti-crisis instruments to safeguard financial and economic stability. This huge regulatory effort simultaneously touched upon the ambition of developing new principles and norms of functioning of the global financial system. For instance, the WTO, largely considered as an international trade regulatory body, extends its regulatory function to financial services. It started to coordinate its work with other global financial institutions. As the WTO became a ‘central site for global governance’,Reference Shaffer ⁹ other global institutions followed. The IMF substantially increased its financial assistance, launched new instruments of support, provided a thorough analysis of the financial sector problems and started to pay much greater attention to monitoring the industry. The Fiscal Monitor (published by the IMF twice a year since 2009) gives a good idea of the extent to which the Fund started monitoring the global financial sector. ¹⁰ Some experts argue that these regulatory measures frequently fell behind the rapid development of the international financial operations (that were going increasingly beyond the control of nation-states), yet there was a reason for this – never before had regulators been confronted with such great challenges to global financial stability. ¹¹

Apart from the global international organizations, a number of specialized informal institutions have emerged as active agents advocating financial stability. Key among them definitely is the G-20, ¹² which initiated and coordinated the introduction of the new set of international financial standards, producing guidelines to increase the efficiency of the financial governance. The key role of the G-20 for financial governance is well known and thoroughly analysed;Reference Larionova, Rakhmangulov and Shelepov ¹³ here, we just want to reposition it at the peak of the pyramid of global financial governance.

Another important institution in the field is the Financial Stability Board (FSB), which after the reset upon the G20 initiative in 2009 emerged as a think-tank and a vital body to produce reforms and supervise financial markets. The Board has become a solid platform for governments and international financial institutions to interact and to strengthen global financial governance.Reference Zuev ¹⁴ The FSB has turned out to be an efficient structure to push forward global finance reforms; its case illustrates problems of the contemporary system of global regulation which are important to the major topic of this article: insufficient participation and binding implementation mechanisms.

Another institution – the Basel Committee on Banking Supervision (BCBS) – has become one of the cornerstones of the financial sector regulatory system at the global level. The committee put forward the capital requirements packages together with other norms, known as the Basel Accords. The Basel Accords intend to amend international standards on how much capital banks need to hold against the financial risks they face. The BCBS rules are based on the principle that the greater the risk to which a bank is exposed, the greater the amount of safe capital the bank needs to hold to safeguard its solvency. In addition to the capital requirements, the Committee introduced accounting procedures, risk management concepts and other measures related to financial activity, thereby enhancing the reliability of the banking system.

In other financial areas, we can register intensive activity demonstrated by specialized organizations such as the International Organization of Securities Commissions (IOSCO), which brings together national bodies responsible for the regulation of securities markets. ¹⁵ IOSCO introduces new regulatory norms, and the majority of the world’s accounting organizations (approximately 150) cooperate within IOSCO. IOSCO’s partner institution is the International Association of Insurance Supervisors (IAIS), which brings together national insurance regulators and supervisory authorities. The association includes about 200 national insurance supervisory authorities and market regulators from 140 countries, which represent around 97% of the world market in this area. ¹⁶ The Association is the main institution to advance the general principles of insurance supervision. As insurance is an integral part of the financial services market, in addition to bringing more order to this market, IAIS promotes global financial stability.

When we study the activities of these global institutions, very dense inter-institutional links appear. Let us take the case of the International Accounting Standards Board (IASB). It acts together with the FSB when monitoring and bringing to a common denominator national financial reporting standards. Another example is FSB cooperation with the Basel Committee on Banking Supervision in elaborating measures to ensure that banks have adequate capital resources. The FSB presented the draft of these measures to the G20 members and promoted the idea of the high-quality bank capital creation. This collaboration contributed to the adoption of the Basel III. ¹⁷ Still another case is the Economic Stability Council working out ‘The Principles for Reducing Reliance on Credit Rating Agencies Ratings’. ¹⁸ These principles resulted from the coordinated work of the G-20, FSB and IOSC. The aforementioned cases reveal to what extent and in which manner the global regulators collaborate in setting up the rules for financial organizations in order to minimize financial risks for the world economy.

The inter-institutional cooperation in some areas is so great that it becomes formal institutionalization. For example, the Joint Forum of International Financial Regulators was established under the auspices of the Basel Committee on Banking Supervision and included the IOSCO and the IAIS to address the issues common to the banking, securities and insurance sectors. The Forum identifies problem areas in regulation, which lack national control. One more case is the formation of the Financial Stability Institute (FSI) under the partnership of the Bank for International Settlements (BIS) and the Basel Committee on Banking Supervision, with the goal to help developing countries train their supervisory staff. The FSI task is to monitor the Basel implementation through regular surveys of the progress achieved by non-BCBS/non-EU jurisdictions on commitments under the Basel Accords. ¹⁹

We could continue the list of institutions and follow up some other examples of their interlinks, yet after having looking at those already mentioned, it becomes clear that all of them strive to develop appropriate regulative networks in close cooperation with each other on a regular basis. The need for such cooperation was stressed years ago but until recently did not become reality. ²⁰ Having analysed the scope and the substance of the regulative activities of formal and informal international organizations and having studied the way all these institutions interact, we can conclude that a larger part of the financial regulation has been initiated at the world level, strengthening global financial governance during the post-crisis decade.

4. Selecting Instruments to Assure Socially Viable Financial Regulation

The starting point in socializing the system of financial regulation is the need for a greater and more reliable accountability of banks. The Basel III prescriptions, even if applied in full, are insufficient for building an effective system of control over the banking sector.Reference Gros ²¹ One of the drawbacks of the existing mechanism is that banks use internal models to calculate capital requirements, resulting in lack of disclosure, and ultimately insufficient minimum leverage ratios. ²² Another difficulty is the growing discrepancy in national approaches to the implementation of the Basel Accords. The Basel IV framework could provide solutions to these issues. The Bank of International Settlements (BIS) is also suggesting different solutions. ²³ The Basel Committee also does a lot on the issue, adopting standards and recommending best practice in banking supervision. In March 2010, the Financial Stability Board appealed to encourage the adherence by all jurisdictions to regulatory and supervisory standards on information exchange. ²⁴

The Economic Stability Council (ESC) pushed forward the introduction of the International Financial Reporting Standards (IFRS). This is particularly important, as national states are reluctant to transfer their powers to supranational financial regulators.Reference Baxter ²⁵ The ESC’s tasks in the sphere of control over simplification and improvement of the international standards of financial reporting and harmonization of financial instruments listing standards were conducted in cooperation with the International Accounting Standards Board (IASB), and with national institutes such as the American Council for Financial Reporting Standards.

A factor to take into account is the type of relationship between private regulators and public supervisors, which can be cooperative or competitive.Reference Cherednychenko ²⁶ The financial industry groups, while demonstrating compliance with the new rules, were trying to adapt to it with minimum losses. Their reaction to an emerging global regulation system was ‘more subtle advocacy strategies…’Reference Young ²⁷ . Global institutions could address this challenge as well.

In March 2014, regulations regarding capital requirements for banks came into effect in all 27 jurisdictions that are members of the Basel Committee on Banking Supervision. These provisions by the banks enhanced a more socially just system, yet this is not enough.

The International Organization of Securities Commissions (IOSCO) actively took part in formulating reliable standards for financial operations in aspects that go far beyond securities trading. For instance, in December 2015, IOSCO published a report on best practices for market intermediaries in the assessment of creditworthiness and the usage of external credit ratings. ²⁸ This report touched upon the activities of brokerage companies and other agents and provided recommendations to the national regulators to make use of the best practices in the supervision policies over market agents. Using these practices, intermediaries should apply methods of credit risk’ assessment that are alternative to the practice provided by Credit Rating Agencies (CRAs). As CRAs bore some responsibility for the severe economic crisis, since they had not adequately assessed the risks on the markets and had not warned investors about them, many brokers became themselves interested in using alternative practices for risk calculation. They are looking for the best practices to secure their investments other than reliance on the CRAs, which used to be the major method in the past.Reference Paudyn ²⁹ Thus, the introduction of a more reliable system is in the interest of major stakeholders who operate on the market and do not want to repeat the mistakes made before the economic crisis.

The Basel Committee on Banking Supervision, IOSCO and IAIS are implementing the jointly developed General Principles of Operation for financial markets supervision bodies, based on four criteria: transparency, financial stability, ability to pay and operational responsibility. The main goal of this policy is to integrate the developed norms into national legal systems to ensure the stability of the global financial markets. Common principles help create a common vision of the problem and on this basis to move forward with the introduction of regulative norms, which in their turn facilitate reaching the goal of financial stability for everybody.

The process of creating new regulation packages by the global institutions is systematic and consistent. January 2016 saw the publication of the next set of changes in requirements for banks regarding market risks revaluation. February 2016 saw two more documents published: Guide to Anti-Money Laundering and Recommendations on Account Opening Procedure. ³⁰ This regularity, continuity and consistency, generated at a global level over the last decade, provides a solid basis to avoid erratic and conflicting national legislative activities. This global level is where and how a new and sound international financial order must be set up.

Expanding controlling functions of the international institutions and the obligation of the national and international actors to make regular reports on their activities help to substantially increase the influence of internationally acknowledged norms. Thus, the global institutions set up a certain standard of financial regulation, and it is crucial that the chosen standard should contain a set of socially acceptable criteria.

The accountability mechanism that is set forth in Basel III requires banks to report on their liquidity coverage ratio and their net stable funding ratio on a regular basis. In case the financial institutions concerned do not fully comply with the provisions of Basel III, they may not be allowed access to the major stock exchange platforms. This becomes a great stimulus to respect the new international prescriptions. Many bankers claim that they are not ready to fulfil the recommendations, labelling them as too tough. Still, the adopted global standards find their way to implementation by most countries in spite of a begrudging attitude on the part of the banking community.

There are other issues to be tackled in order to socialize bank regulations. Problems waiting to be resolved by the international regulators are, for instance being ‘too big to fail’ and the ‘shadow banking system’. ³¹ These all lie within the competence of international institutions.Reference Tobias ³² Banks ‘too big to fail’ are a special case in terms of social responsibility, and here an international regulative response to the issue is very important.

There is a pressure on different financial institutions to take more responsibility over their activities. In the year 2013, a methodology to identify globally systemically important insurance companies (G-SIICs) and an updated technique for doing the same thing with globally systemically important banks (G-SIBs) were published. On this basis, the list of G-SIBs was composed (including 28 G-SIBs), and an initial list of G-SIICs has been compiled and updated annually starting from November 2014. Financial institutions included in these two lists are obliged to meet higher requirements and fall under more rigorous supervision. Plans for the settlement of insolvency were developed for them. Liquidity adequacy requirements for 28 G-SIBs were also developed and in most cases the G-SIBs increased their capital resources before the deadlines. Additional stringent requirements for liquidity adequacy for G-SIBs came gradually into being between 2016 and 2019.

Late in 2014, the FSB put forward an initiative increasing large banks’ accountability in order to upgrade the risk absorption role of the global banking system.Reference Bruno and Song Shin ³³ The proposal was to oblige the global, systemically important banks (G-SIBs) to have additional reserve assets so that losses would not be shifted on to taxpayers’ shoulders in case of emergency. On 11 November 2015, following a quantitative impact assessment, the Financial Stability Board finalized the total loss absorbing capacity (TLAC) minimal requirements for G-SIBs. Although the initiative was endorsed by the G20 summit, the implementation mechanisms are still to be detailed at a national level. Nevertheless, this move goes in the right direction – banks should bear the larger part of responsibility to cover eventual risks.

In 2015, the Financial Stability Board launched a peer review on the implementation of the policy framework for financial stability risks posed by non-bank financial entities (‘other shadow banking entities’). ³⁴ The objective of the review was to evaluate the progress made by jurisdictions in implementing the principles to reduce the importance of the shadow banking set out in the framework. The peer review appears as another instrument to build up a more reliable system.

Another instrument of financial governance is to introduce sanctions based on stress tests. The conduction of stress tests on a regular basis is an innovation in global governance. The terms of reference of the stress tests, undertaken by the FSB, stipulate that a warning is issued if non-compliance is revealed for the first time. Inclusion of a member-state or its banking institutions in ‘grey’ and ‘black’ lists in case of repeated non-compliance entails imposition of sanctions by the Financial Stability Board. Thus, the members of FSB are involved in the formulation of general rules, norms and procedures, in selecting proper instruments of implementation, providing for supervisory and controlling functions, thus assuring compliance with the adopted recommendations. In November 2015 the FSB published the first report on the Implementation and Effects of the G20 Financial Regulatory Reforms. Implementation of the Basel III reforms for the bank capital and liquidity requirements went ahead of schedule. ³⁵

One of the problems is that most of the global institutions’ decisions are recommendatory, although a relatively high level of compliance appears as an extraordinary feature of the global financial governance.Reference Brummer ³⁶ In accordance with the provisions of the Charter of the FSB, the member countries are obliged to periodically follow the Financial Sector Assessment Program (FSAP) of the IMF and World Bank. They have to present the country surveys evaluating the degree of implementation of international standards, and the work they undertake to provide these reports builds up compliance.

Summing up the overview of the instruments, we can conclude that a vast number of new measures appear: monitoring procedures, checks and stress tests, new standards of reporting and accounting, new risk-management techniques and exchange of best practices, new capital requirements, etc. However, there are two big problems still unresolved.

Market speculations remain very attractive for the banks; thus, the risk of building up dangerous financial bubbles continues to be high, and the bank’s safe position could be questioned one day or another. Chances are high that the necessity to provide liquidity for the banks could be on the governmental agenda again. However, as in the past, there is no fund to rescue banks in case of necessity, financed by the bankers themselves. What could be a rational solution?

5. Financial Transaction Tax – Social Responsibility and Financial Stability

Is the current contribution from the financial sector to the financial stability for the majority of customers fair enough? The ongoing reforms since the outbreak of the global financial crisis do not solve one key problem, namely the enormous cost to rescue the financial sector, which was footed to a large extent by the taxpayers, and the absence of a fair contribution from the financial sector itself.

What else could be done? If we regard market instruments, taxation is the first thing to come to mind. This could serve two goals: discourage speculation and provide a source of financing for a fund to rescue banks in trouble.

The discussion on introducing various forms of financial tax has a long history. Back in 1936 John Maynard Keynes wrote that ‘The introduction of a substantial Government transfer tax on all transactions [on Stock Exchanges] might prove the most serviceable reform available with a view to mitigating the predominance of speculation over enterprise in the United States’.Reference Keynes ³⁷

The regulatory system needs adequate mechanisms to discourage excessive speculating activity. Basel III provides for stronger capital requirements, assuring more responsibility by the banks, yet does little to reduce speculation, which continues to flourish with redundant money in the financial sector and reduced finance for the real sector economy.

In 2009, Paul Krugman published an article with the title ‘Let’s make banking boring again’.Reference Krugman ³⁸ He argued that the banking industry that emerged from the Great Depression in the USA was tightly regulated. Banks served as intermediators; banking was boring. After 1980, however, many of the regulations on banks were lifted, and banking became exciting again. This was when speculative activity grew. Debts began rising rapidly, and the financial industry became massive. Krugman suggested separating investment banking from traditional banking activities. The ongoing structural measures to introduce limitations on banking such as the US Volcker rule, the UK’s Vickers ring-fence, and the EU’s Liikanen proposal, which envisage creating the functional separation of operations, were all advanced as a reaction to the inadequate management of the excessively risky speculative investments by deposit taking banks.

In our view, it is more difficult to adequately control the separation of speculative and deposit-credit activities of the banks than it is to introduce a proper taxation on speculative activities. Even if controlling such separation were possible, those speculative activities will be switched to the shadow banking system, which in its turn is still harder to control.

The global institutions are trying to catch up. In August 2013, the Financial Stability Board published recommendations to strengthen supervision on shadow banking. The Basel committee on Banking Supervision started to work out measures to implement these recommendations. It published a new standard, revising the prudential treatment of banks’ investments in the equity of funds within the Basel capital framework (to take effect from the start of 2017), which will be applied to banks’ equity investments in all funds (e.g. hedge funds, managed funds and investment funds). ³⁹ Still, it is extremely difficult to make banks reduce their speculative activities and thus lessen the risks to the financial system. Why not let the banks do the job themselves, creating substantial buffers outside of their books at the expense of the same banking community?

One of the most suitable tools for this role seems to be the Financial Transaction Tax (FTT), a point of view shared by many analysts.Reference Baker ⁴⁰ However, the critical mass of arguments for its implementation has not yet been accumulated. FTT is a fee charged on financial institutions for certain financial operations they carry out; this may concern stocks, bonds, shares, derivatives, etc. The taxing modes may vary by residence of the investor or of the issuer or by the asset’s origin. It is essential that the place of the operation is irrelevant, which decreases the attractiveness of offshore jurisdictions with regard to this type of operations.

The common argument stopping countries from introducing FTT is the risk that the turnover of the financial sector will be reduced and a number of financial institutions will flee to non-taxed destinations. However, the tax rate envisaged is too small to really divert businesses from being registered in their country of origin and to make a visible impact on their activities – the FTT mostly does not exceed a few tenths (or even hundredths) of a percent of the operation amount. The tax may have to be split between the seller and the buyer. Among the other negative consequences of the introduction of FTT is a likely increase in securities prices and a reduction in investment. Some experts dispute the very idea of taxing such operations. ⁴¹ The use of the FTT can lead to a contraction not only in speculative trade, but also in transactions made by brokers with non-speculative purposes. An increased cost of operations adds to the concern of governments as they assume investors might be less willing to buy state bonds due to a new taxation. Traders and investors may also move overseas in case the tax is introduced in their country. Although, as mentioned above, the country of operation is not critical for the collection of the tax, bankers may find loopholes here.

The additional funds from the FTT received by the state or by an international organization (if the Fund is governed globally, which in our opinion is the preferable option) are primarily referred to as an advantage of this regulation. Such a tax could have empowered the G-20 (or the IMF) with the necessary financial resources to move forward faster with reforms of the global financial sector. For example, the US Congress proposing the introduction of FTT estimates getting only $180 billion from the US banks during the period 2015 to 2023 (see Table 1). A global tax could yield much more.

Table 1

Budget revenues from a tax on financial transactions in the US.

Source: Congressional Budget Office. Staff of the Joint Committee of Taxation. November 2013. URL: www.cbo.gov/budget-options/2013/44855.

The EU Council considered the introduction of FTT so as not to put the burden for bailouts on the taxpayers, as happened during the global financial crisis of 2008. A FTT on the banking system would appear to be a fair way to assure something more like a socially just financial regulation.

Another important theoretical point is that, apart from money-raising arguments, the FTT is an appropriate market tool to lower incentives for excessive speculation. It is unrealistic to expect that the use of the FTT will dramatically reduce the number of short-term and high-speculative securities trading, as the rate of the tax is minimal at the initial stage of introduction. However, the motivation for speculative activities may be at least reduced, and that would be a crucial sign for the bankers. FTT has significant advantages over other taxes on financial activities as it is feasible and difficult to evade. For instance, brokers specializing in high-frequency trade will find it technically difficult to conduct operations from a different place rather than from their respective countries, as computer proximity to the Stock Exchange is critical.

Still another argument is that the FTT, by reducing systemic risks, contributes to sustainable economic growth. At the time of growth, the volume of the rescue Funds and thus the ability to safeguard financial stability will be steadily increasing. Justifying the introduction of the tax, James Tobin pointed out another positive effect of the FTT on the economy. If a decrease in speculation activity occurs with a lowering of excessive profit margins, it makes the financial sector less attractive for active, intelligent and educated professionals. This could mean that non-financial services sectors such as the medical, scientific or industrial sectors will see an influx of talented specialists, with a concomitant greater focus on industrial growth.

Beyond these effects, the FTT could be vital because of its deep-rooted substantial effects, which are of special importance to this study. This way of taxation could contribute to a more equitable income distribution and to a slowdown in disproportional wealth concentration. As described in the works of Thomas Piketty, the problem is on top of the global agenda.Reference Piketty ⁴² Researches show that levying FTT has a progressive effect. Roughly, three-quarters of its collection affects taxpayers in the highest income quintile and more than 40% falls on the top 1%.Reference Burman and Gale ⁴³ One major step to socialize the FTT mechanism could be the introduction of smart accountability systems, in particular exemptions for small companies and companies engaged in socially responsible activities, and providing special conditions for pension funds, for example.

Finally, it is crucial that the bankers themselves and not the taxpayers bear the financial responsibility for saving financial institutions at times of crisis, shifting the burden of emergency bailouts away from the taxpayers, thus making banks assume their due part in the social responsibility for financial regulation.

6. The Debate Goes On. Deficits of the Practical Implementation of the Idea

In 2011, a number of EU member states – Austria, Belgium, France, Germany, Italy and Spain among them – put forward the idea of a common FTT for the European Union. In December 2012, the European Parliament voted for the proposal, supported by 11 EU members. In January 2013, the Council of the European Union approved the introduction of the FTT, and this was a very significant first move to implement the FTT globally. The EU soft power impact of example played an important role in many other initiatives; it could do so this time as well. The bank support fund created with the FTT disbursements could become a clever instrument to assure financial stability – once it is created in the EU, other countries might wish to follow and to have such an instrument as well.

Still, divergences remain even at the top political level on how to make use of a FTT in a more effective way. For instance, the EU leaders Nicolas Sarkozy and Angela Merkel could not agree on whether to spend the money raised by a FTT on international aid. In May 2014, ten out of the initial 11 participating member states (except Slovenia) agreed to seek a tax on equities and derivatives by 2016. In December 2015, Estonia decided to opt out, arguing that the cost of tax collecting will surpass the revenues (which is not the case). Setting up a common EU system for the taxation of financial transactions is a method of ensuring that banks make a fair contribution to compensate for the cost of surmounting the crisis, since they receive substantial amounts of governmental support.

The deadline to implement the agreement was shifted several times. The United Kingdom, here as in many other cases, made clear it would use special protective measures in case of damage to its market.Reference Maurice ⁴⁴ The country thought it would never work unless the tax was levied globally by the G20. The authors of the current paper share this view to a certain extent, without exaggerating the negative effect that London as a financial centre would lose out to New York or Singapore.

Taking into consideration the remaining lack of unity on the issue, the EU is undermining the introduction of the FTT in the rest of the world. The opposite is also true: in the case of adoption of the tax in the EU, the critical mass necessary for its transformation into a truly global instrument of regulation could be formed.

The United States was against the FTT because of the lobbying pressure of investors, bankers and hedge funds. However, during the 2016 election campaign, proposals for its introduction were renewed. Democrats Hillary Clinton and Martin O’Malley proposed to introduce taxation of high-frequency financial transactions to safeguard market stability. ⁴⁵

The idea of the introduction of the FTT at a global level was raised by the G20 in 2008 and received the support of a majority of member-states at that time. Unfortunately, in 2010, at the summit in Toronto, the proposal was shelved; this was unexpected, as currently 16 of the 20 members of the G20 use different types of taxes with similar effects to a FTT. The most widespread taxes are on large companies’ shares trade, the EU tax on short sales and sovereign credit default swaps (CDRs), or taxes aimed at high-frequency trade (for example, a tax on cancelled orders in France or on modified orders in Italy). Globally, more than 30 countries use different variations of the FTT, applying rates of 0.1 to 0.5%, among them the United Kingdom, France, Belgium, Greece, Hong Kong, Switzerland, Australia, and South Korea. The current UK FTT regime did not lead investors to escape the country as it is not related to the investor’s residence, as was the case with a Swedish tax.Reference Seely ⁴⁶

Thus, unification of these taxes could have been convenient for everybody.Reference Hemmelgarn and Nicodeme ⁴⁷ Unification of taxes makes the argument of an additional burden with the introduction of the FTT for financial institutions irrelevant, as the rate of taxation is very small.

In all the states that have adopted variations of FTT as well as in most other countries (e.g. in the EU) the support for the tax by civil society is high, and it also has a strong backing of the expert community: there have been numerous actions in support of the FTT involving prominent economists, ⁴⁸ and politicians have to take that in to account.

In order to respect social justice, the FTT mechanism provides exemptions for different categories of persons and institutions in different countries. For example, in Italy the tax on transactions with shares of national companies and derivatives is not applied to companies operating in socially meaningful and ethical spheres.Reference Hemmelgarn and Nicodeme ⁴⁹ The introduction of the financial operations taxation in a selective way should be an additional tool when thinking about socializing the regulative financial environment.

The transposition of the FTT at a regional and at the global level is a prerequisite for the actors’ acceptance of the tax. The cases of Estonia and Sweden demonstrate that the introduction of the tax on a unilateral basis by a small country alone may be not efficient – most of the studies reveal that a FTT with a broad (global) tax base provides greater revenues.Reference Schaefer ⁵⁰ The necessary synergies appear at the global level much more easily.

To socialize efficiently the impact of the FTT introduction, it is critical to define exact patterns of spending the funds raised by the states when there is no necessity for bank assistance – we do not face crises all the time; thus, the Fund could be used for some other purposes. The EU countries’ experience demonstrates that it is possible to set ‘far reaching’ goals, such as using the new funds to grant aid to the poorest countries. A way of spending could be financing growth-enhancing projects and the formation of an international ‘safety cushion’ for the banks, which would be the incentive for their readiness to support the initiative. In our view, it would have been much easier to gain supporters for FTT introduction within the banking community had it been announced that the Basel III norms on capital requirements would not be applied in full for countries that had created a fund for assistance to the banks in trouble. Creating such a fund means that banks could have more flexibility in their credit policies, as the Fund, on becoming operational, could provide necessary assistance at the expense of the banks themselves. In this case, one could expect a positive effect on banking community leaders to stimulate them to accept the taxation.

Using a financial transaction tax as a tool to discourage excessive speculation without hampering any other activity seems to be a socially responsible measure, while working for financial stability at the same time.