Why reregulation after the crisis is feeble: Shadow banking, offshore financial centers, and jurisdictional ‘competition’

   1   0 Blog, Tax Havens & Financial Crisis
Thomas_Rixen_284

Prof. Thomas Rixen

Prof. Thomas Rixen, who has written a lot about tax ‘competition’ (aka tax wars) in the past, has a new article looking at similar dynamics in the area of financial regulation. Entitled Why reregulation after the crisis is feeble: Shadow banking, offshore financial centers, and jurisdictional competition, it points out that the shadow banking sector, many of whose players were implicated in the global financial crisis that erupted almost a decade ago, is heavily entwined with offshore financial centres.  Typically, this involved banks sponsoring off-balance sheet vehicles, located in places like Cayman or Luxembourg: these supposedly took risk off the banks’ books, but then returned to haunt the banks when they blew up, causing widespread economic disaster. Rixen:

“Most shadow bank entities are incorporated offshore and enjoy the tax and regulatory privileges offered by these places. It was, therefore, warranted to target OFCs after the crisis – one of the most immediate and publicly discussed policy reactions of the G20. However, the regulatory response toward OFCs and shadow banking falls short.”

He then examines why. The core point he makes, perhaps, is that while the world has engaged seriously (if imperfectly) with tax haven issues such as financial secrecy, it has hardly even slapped the wrists of the tax havens for their role in these activities. He puts it bluntly:

“I submit that the regulatory reaction largely serves a symbolic purpose to acquiesce popular sentiments without having actual effect.”

Politicians can be seen to “do something” about tax havens by cracking down on secrecy, but this obscures large and powerful malign forces, which we’ve written extensively about.

The key reasons for this failure to act seriously, he argues, are firstly ‘jurisdictional competition’ – a fear of putting into place serious safeguards for fear that the often abusive activity will flee to more friendly climes – and secondly, what we are TJN call ‘state capture’ – where financial interests effectively control the policy-making apparatus, particularly in small jurisdictions. And of course a key component of that capture is this ‘jurisdictional competition’ – the ‘don’t regulate us too much or we’ll flee to Geneva or Singapore’ cry that we hear all the time, in country after country.

Rixen’s key contribution, in academic terms, is to bring the problem of jurisdictional ‘competition’ to centre stage, in terms of explaining why it’s so difficult to regulate this stuff.

“While the existence of such competition is, of course, well known to international political economists working on financial markets, it has not been discussed as the main factor in the literature on regulatory reform after the crisis.”

This is big stuff, of course. As Rixen puts it:

“The Financial Stability Board (FSB 2012a, pp. 8–9) estimated the shadow banking sector at around $67 trillion at the end of 2011, which is about 25 percent of the global financial system.”

That’s ‘trillions’ with a ‘t’.

As an aside, he adds:

“While there is no generally accepted definition of an OFC, in this paper the term refers to states or dependent territories which intentionally create regulations and tax rules for the primary benefit and use of those not resident in their geographical domain. Regulation and taxation are designed to circumvent the legislation of other jurisdictions.”

That is completely consistent with an informal way we at TJN sometimes talk about these places, boiling down the phenomenon to two words: ‘escape’ and ‘elsewhere.’ Take your money or your activities elsewhere, to escape the rules.

We could go on: there’s plenty more in here, but the main purpose here is to flag this piece of research.

 

 


Related Posts

UN must defend target to curtail multinational companies’ tax abuse

Photo by Luca Santori, Creative Commons LicenseThe Tax Justice Network, The Independent Commission for the Reform of International Corporate Taxation, and the Global Alliance for Tax Justice call on the UN Secretary General to make sure the commitment to action on tax abuses by multinational companies remains part of the new UN Sustainable Development Goals.

READ MORE →

The BVI: Responsible for worldwide tax losses of $37.5 billion a year

BVI report blogAn extraordinary report by consultants Capital Economics, for BVI Finance, claims that the British Virgin Islands are responsible for $1.5 trillion of assets invested around the world, and that these result in 2.2 million jobs and $15 billion in tax revenue. A better approximation would be that the BVI imposes global tax losses of $37.5 […]

READ MORE →

Event: Making Tax Work for Women in the UK and Globally

Invitation_ Tax and Gender eventOn Wednesday 28th June 2017 at 16.30 our very own Liz Nelson will be speaking at an event in London that aims to bring together gender and tax justice advocates to highlight the need for coherent and gender-responsive fiscal policies to safeguard the rights of women and girls both in the UK and globally. The […]

READ MORE →

Historic event on women, human rights and tax justice in Bogota

BogotaLast week civil society organisations, researchers, labour union activists and policy makers met in Bogota, Colombia to explore how tax justice issues can ensure governments, multinational corporations and others meet their obligations to women in order to secure their full range of human rights. The Women’s Rights and Tax Justice conference opened with a conversation […]

READ MORE →

The Offshore Wrapper: the Panama Papers, one year on

Photos from the Protest outside PwC 1 Embankment Place, part of the Global week of action for tax justiceWelcome to the Offshore Wrapper – your weekly update from TJN.  Happy Paniversary! This week it’s been one year since the Panama Papers were leaked, and a number of organisations around the world have been marking the occasion though the global week of action for tax justice. In London, activists from the TJN and the […]

READ MORE →

One thought on “Why reregulation after the crisis is feeble: Shadow banking, offshore financial centers, and jurisdictional ‘competition’

  1. Peter says:

    Great article. It is, however, from 2013 and not strictly speaking “new”.

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to Top