It seems as though the European Union has finally woken up.
The continuing financial crisis and failing Eurozone economies appear to have accelerated efforts to create a European Monetary Fund and introduce an EU-wide tax on financial transactions (FTT), also known as the Tobin Tax. The role of the Fund will be to quickly address systemic shocks in the Eurozone, while the FTT is meant to "force banks to make a contribution back to society".
Both proposals are positive and valid in principle but when it comes to maintaining international financial stability they are not enough.
When you think of Tobin Tax as a way for banks to give money back to society and help the disadvantaged, then it is a good concept. Societies bailed banks out during the last financial crisis, now it is time to give something back, simple. But there is another benefit of introducing FTTs that is not widely talked about: it is a great way to discourage banks from making a lot of risky, short-term transactions. The same risky transactions which led to the financial crisis in the frist place. Instead, banks are encouraged to accumulate capital that can protect them when faced with external shocks. The result is a rebalanced economy.
However, in terms of maintaining global financial stability in the long run, Tobin Tax is not going to have a strong enough impact. It is only a short-term solution.
What international financial system really needs is stability and measures that would prevent crises from recurring. Because in this day and age banks and other financial institutions are closely interconnected, this can only be achieved by worldwide acceptance of common banking standards addressing issues of risk assessment, amounts of capital and liquid assets that banks need to hold (these should depend on the state of the economy at a given time), transparency measures and common monitoring guidelines for supervisory institutions (national and international).
Establishment of the EMF is a step in the right direction. European Commission took advantage of the deepening crisis to push forward with closer financial integration in the EU. This could pave the way for establishment of common banking standards in Europe.
However, in order to achieve global financial stability, European efforts should be followed by worldwide acceptance of universal banking rules, such as the ones spelled out in the Basel III Accord by the Basel Committee on Banking Supervision.
International implementation of Basel standards can help improve stability and prevent financial crises in the future. The Accord also has the capacity to level the playing field for banks across the world. It would provide a stable foundation for growth which would be especially beneficial to developing countries.
As a result of the recent economic turmoil, Basel Committee appears to have increased its efforts to encourage universal adoption of Basel III Accord. Banks and financial institutions should follow suit.
You can read more about Basel III Accord on Bank for International Settlements website:
- Short introduction to Basel III: http://www.bis.org/bcbs/basel3.htm
- Summary of Basel III: http://www.bis.org/bcbs/basel3/b3summarytable.pdf
- Outcome of the September 2011 Basel Committee meeting: http://www.bis.org/press/p110928.htm
