Financial transaction tax better than ban -- Honohan
Published 15/06/2010 | 05:00
TAXING certain financial transactions would be "potentially better" than banning them outright, Central Bank governor Patrick Honohan told a Dublin conference yesterday.
His comments come as countries throughout Europe consider the implementation of financial transaction taxes as an alternative to banning problematic transactions like naked short-selling.
Addressing the Infiniti conference on international finance, Professor Honohan said the discussions were likely to conclude that such taxes would "do little for improving the efficiency or safety of the financial system" and "would not generate as much revenue as some suppose".
"Nevertheless, it does seem possible to use some form of corrective taxation as a kind of graduated type of regulation, potentially better than outright banning of product," Prof Honohan added, pointing out that the taxes could also be a "useful complement" to traditional regulatory activities.
A spokeswoman for the Central Bank declined to comment on whether Prof Honohan would like to see Ireland introduce financial transaction taxes. It is understood, however, that he is not actively advancing plans to that end.
The former Trinity economist was speaking less than a week after the publication of his damning report into the regulatory failings that led to Ireland's economic collapse.
He declined to comment on that report yesterday, but is expected to explain his findings when he appears before an Oireachtas committee meeting this morning.
Prof Honohan also used his Infiniti address to air the notion of whether countries, like banks, should be required to set money aside for "unexpected" risks.
Banks were required to make provisions for "expected" losses and keep "capital reserves" for the unexpected, Prof Honohan said.
Sovereigns, on the other hand, are governed by the Stability and Growth Pact. "The expected [loss] is there but the unexpected is not," Prof Honohan said, suggesting the system could "learn" from banking practices.
The Central Bank governor also detailed the "overblown" response of interbank markets to "perceived fiscal risks".
"Heightened market concerns about the fiscal situation in some countries have spilled over to banks and sovereigns, in turn hampering the transmission of low monetary rates throughout the eurozone," Prof Honohan said.
"This led to a situation a few weeks ago where you had effectively frozen money markets reflecting what seems to be an overblown response to perceived fiscal risks."
Countries then took "an extensive policy response" which has seen "quite sharp fiscal adjustment measures" as well as a "huge commitment of public funds" totalling some €750bn, Prof Honohan added.