When Lehman Brothers collapsed, no one knew which bank would be next. Counterparties lost faith in all measures of the soundness of banks. Under such a scenario, the only course of action that made sense was to hold one’s money close to the chest. This individually rational response was collectively disastrous. The uncertainty around the size and distribution of potential losses led to systemic collapse.

Something similar has been unfolding in the Eurozone bank/sovereign crisis albeit in slow motion. The failure to draw a line under the crisis has meant that the continuing uncertainty around the size and distribution of losses in the Eurozone is haemorrhaging our economy. The size of this deadweight economic loss, with all its human cost, is increasing with every additional day of inaction. Political dithering and mixed messages have ensured that no one knows how, when or where these losses will materialize.

A welcome step

“Throughout this crisis, EU governments put the interests of bank bondholders over those of taxpayers. This has eroded market discipline, imposed unnecessary and unfair burdens on EU taxpayers and shielded bondholders from the consequences of the risks they undertook. The Commissions’ proposals today will help draw a line under this costly policy mistake.”

“The crisis exposed the lack of a fair, predictable and market stabilizing burden sharing regime for both sovereign and bank bondholders. This proposal plugs a part of that gap.”

“A bondholder bail-in regime, properly implemented, can be good for financial stability, taxpayers and even for bondholders themselves if it protects against value destroying bank runs and bankruptcy.”

“Proposals to bail in or haircut bank bondholders can help 1) improve market discipline 2) bring about fairer burden sharing 3) protect taxpayers 4) stabilize the EU financial system.”

Please click below to see an archived webcast of the European Parliament Testimony of Re-Define Managing Director Sony Kapoor on Financial Transaction Taxes. This hearing was conducted by the full ECON committee on the 2nd of December 2009.

Sony Kapoor European Parliament Testimony on Financial Transaction Taxes

For the speech please look at time stamp 16:20:10 to 16:27:20 and for answers to MEP questions please look at time stamp 17:01:20 to 17:09:00.

A copy of the submitted written Testimony of Mr Kapoor will be available both here and on the European Parliament website on Monday the 7th of December. 

Other details of the hearing can be accessed here. 

Tobin taxes are back in circulation again. The financial crisis has highlighted the fundamental problems of financial stability as well as the costs associated with bailouts of the financial sector.

Interestingly the family of tobin taxes, better known as financial transaction taxes ot security transaction taxes are good tools which can help tackle both of these problems. Their potential and role in helping provide solutions to the challenges confronting us are discussed briefly in this policy note here. This note which was written a while back will be followed by a Re-Define Policy Paper out next week.