Sajid M. Chaudhry

Balancing the regulation and taxation of banking

This study gives an overview of bank taxation as an alternative to prudential regulations or non-revenue taxation. We review existing bank taxation with a view to eliminating distortions in the tax system, which have incentivized banks to engage in risky activities in the past. We furthermore analyze taxation of financial instruments trading and taxation of banking products and services and their ability to finance resolution mechanisms for banks and to ensure their stability. In this respect, we put forward the following arguments: (1) that a financial transaction tax is economically inefficient and potentially costly for the economy and may not protect taxpayers; (2) that a bank levy used to finance deposit guarantee and bank resolution mechanisms is potentially useful for financial stability, but that it poses the threat of double taxation, together with the proposed Basel-III Liquidity Coverage Ratio; and (3) that we support the elimination of exemption from value added tax (VAT) for financial services in order to provide banks with a level playing field, while retaining exemption for basic payments services. This is expected to improve efficiency by reducing the wasteful use of financial services.

Scotland as an optimal currency area

The June 2016 UK referendum on continued EU membership where the people of Scotland voted to remain, while the rest of the United Kingdom voted to leave, once again makes the issue of whether Scotland is an optimal currency area very topical. England voted strongly to leave Europe while Scotland backed remain by 62% to 38%. The Scottish government published its draft bill on a second independence referendum in October 2016. The move does not mean another referendum will definitely be held, but this does raise the possibility that Scotland might choose independence and staying in the EU without the rest of the United Kingdom. If Scotland charts a course of independence from the rest of the United Kingdom, then they would likely either issue their own currency or join or form another currency area. In this paper, we test the microeconomic foundations of a common currency area for Scotland, United Kingdom, and the rest of the United Kingdom without Scotland. We find that the United Kingdom, Scotland, and the United Kingdom without Scotland all meet the microeconomic criteria for a common currency area. In contrast, banking data suggest that lending in Scotland is different from lending in the rest of the United Kingdom, adding some doubt to the issue of whether or not Scotland is a common currency area with the United Kingdom.

Business and Financial Cycles in the Eurozone: Synchronization or Decoupling

This paper proposes a novel approach, based on probit framework, toward measuring bilateral synchronization, separately within business cycles and within financial cycles, for 11 eurozone economies. We find strong cross†country synchronization both within real cycles and within financial cycles. Moreover, financial cycle synchronization dominates business cycle synchronization in the eurozone, especially after the introduction of the single currency. For some peripheral country pairs, we even find some evidence of ‘decoupling’ of business cycles relative to the core countries but majority of marginal business cycle effects do not change much before and after the common currency. The former observation supports the plea for more Europe†wide macro†prudential regulation whereas the latter observation gives ammunition to those economists who always stress that the euro zone architecture is an unfinished business and that the conditions for an optimum currency area are not fulfilled.