Of Readings: Banks and Regulatory Arbitrage

Reading John Kay’s Other People’s Money (Profile Books, 2016). Not an easy lecture but the concept (OPM – other People’s Money) has been and remains catchy.

The book is not only about banks, but I personally find a few assertions made by the author when discussing banks most challenging, especially since we – the Other People – still believe that banks are sanctuaries of surety and stability (and cryptocurrencies still pose a meagre challenge to that belief).

One is the following (on page 219): “…regulators and governments in continental Europe were more ready than their Anglo-Saxon counterparts to connive in concealing the scale of disaster that the global financial crisis represented for the banking system. Europe today has many ‘zombie banks’ – institutions that are essentially insolvent but which rely on central bank support as they hope, over many years, to trade their way out of difficulties.”

I hope my bank is not one of the zombies. Is there any way to be sure? My supposedly ‘welfare state’ would probably do everything to keep that piece of vital information away from me.

Here is another one (page 224): “Much the most serious, and very long-established, source of arbitrage in the financial system is the line between debt and equity; indeed the principle that there is a tax advantage to be gained by substituting debt for equity is so familiar to everyone in the financial world that it is regarded as a fact of commercial life rather than an instance of financial arbitrage. The variety of adverse consequences – on the costs and complexity of fiscal systems, on government’s ability to collect tax revenues and on financial stability – are numerous and widely discussed… .”

So the states subvert their own capacity to collect taxes from (supposedly) its richest tax-payers (banks) by allowing them to use the debt for equity substitution (among many other feats of financial arbitrage) and leading to states’ own insolvency. No wonder some of our clients have such a hard time realizing any claims against the state.

And finally, a really juicy one (page 224-225): “In a depressingly familiar hypocritical style, politicians have simultaneously denounced these avoidance activities while introducing measures to attract revenue from other countries and favour companies whose interests they espouse.”

Wow! No comment to this one.

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