Home' Trinidad and Tobago Guardian : May 18th 2014 Contents MAY 18 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
THE ECONOMIST | SBG19
The war on those stashing undisclosed money off-
shore intensified this week when 47 countries, including
the Group of 20 and some prominent tax havens,
sealed a pact that will shake up the sharing of tax
Under the present system countries have to file
requests with each other for data on suspected cheats.
Even reasonable inquiries often are rejected as "fishing
expeditions." In the future the signatories, and dozens
of others that later will be pressed into joining, auto-
matically will exchange information once a year. This
will include bank balances, interest income, dividends
and the proceeds of sales, which can be used to assess
Some countries are likely to set up special arrange-
ments, with reduced penalties, to encourage noncom-
pliant taxpayers to bring home their money now rather
than wait to be caught once the new system kicks in,
probably in 2017. The deal also increases pressure on
banks to identify the ultimate owners of shell companies
and trusts, behind which tax evaders often hide.
The catalyst for the agreement was America s Foreign
Account Tax Compliance Act. The law, passed in 2010,
soon will impose stiff penalties on foreign financial
firms that fail to declare their American clients. Once
America began pushing for automatic declarations,
other big countries did the same.
The most eye-catching signatory to the accord is
Switzerland, whose banks were at the centre of the
scandals that gave rise to the Tax Compliance Act.
The world s most famous offshore wealth-management
centre was built on supposedly ironclad bank secrecy,
but it has been forced to buckle under international
pressure. The American authorities, for instance, are
currently leaning on Credit Suisse to plead guilty to
charges of aiding American tax dodgers.
This is momentous.
For the Swiss, agreeing to swap client data system-
atically is the cultural equivalent of Americans giving
up guns. Singapore, which has earned a reputation as
the Switzerland of the East, also is a party to the deal.
Several challenges must be overcome to make it
work. Data-collection systems need to be upgraded
and harmonized. Even the most sophisticated tax
authorities could struggle to process the deluge of
information coming their way. Without assistance,
poor countries whose elites dodge taxes using rich-
world havens will not reap the benefits.
More havens need to be brought into the fold.
Britain s offshore satellites, such as Jersey and the Cay-
man Islands, are grudgingly on board, but it will be
harder to corral Panama, Dubai and the havens dotted
around the Indian and Pacific Oceans, although black-
listing can be a powerful tool. Until they sign up, the
likes of Luxembourg and Switzerland may have an
excuse to drag their feet in implementing the new
Still, the pace of change has been remarkable. Global
information exchange, unthinkable a decade ago, is
Tax evaders can be ingenious, but their options are
@2014 The Economist Newspaper Ltd. Distributed
by the New York Times Syndicate
Mark Carney, governor
of the Bank of Eng-
land and head of the
Board, an internation-
al watchdog set up to
guard against future financial crises, recently
was asked to identify the greatest danger
to the world economy. He chose shadow
banking in the emerging markets.
Shadow banking certainly has the cre-
dentials to be a global bogeyman. It is huge,
fast-growing in certain forms and little
understood, a powerful tool for good but,
if carelessly managed, potentially explosive.
The FSB, which defines shadow banking
as lending by institutions other than banks,
reckons that it accounts for a quarter of the
global financial system, with assets of US$71
trillion at the beginning of last year, up from
US$26 trillion a decade earlier. In some
countries shadow banks are expanding even
faster: In China, for instance, they grew by
42 per cent in 2012 alone.
There is disagreement, however, about
what counts as shadow banking. The core
is credit, everything from China s loan-
making trust companies to Western peer-
to-peer lending schemes and money-market
A broader definition, however, would
include any bank-like activity undertaken
by a firm not regulated as a bank, such as
the mobile-payment systems offered by
Vodafone, the bond-trading platforms set
up by technology firms or the investment
products sold by Blackrock.
Services like these are proliferating because
orthodox banks are on the defensive, battered
by losses incurred during the financial crisis
and beset by heavier regulation, higher cap-
ital requirements, endless legal troubles and
immense fines. The banks are retrenching,
cutting lending and shutting whole divi-
In America, for instance, investment banks
are no longer allowed to trade on their own
account, only on behalf of clients. British
banks, meanwhile, have slashed their loans
to businesses by almost 30 per cent since
2007, with Barclays this week confirming
plans to shed as many as 14,000 employees.
Shadow banks are filling these gaps.
Nobody is too worried by competitors
challenging banks in their ancillary busi-
nesses. If, say, Google can help people man-
age their money more efficiently, that is to
be welcomed. The argument is about cred-
it. In some ways, it is a good thing that lend-
ing outside the banking system is expanding.
Banks are regulated for a reason: They have
big "maturity mismatches," borrowing
money largely for short periods while lending
it out for the longer term, have enormous
leverage and are tangled up in complicated
ways with other financial institutions, so
they are especially fragile.
When they get into trouble, taxpayers
tend to end up on the hook, both because
governments guarantee deposits and because
they are afraid to let such big and compli-
cated institutions fail. If some lending is
moving from banks to less dangerous enti-
ties, the financial system should be safer.
For these reasons Carney should be hap-
pier if, say, a British brewer takes a long-
term loan from a pension fund or a life
insurer with long-term liabilities instead of
from a bank. If the loan goes wrong, the
creditor will lose money, but without the
gelignite of leverage, the elaborate web of
counterparties and the depositors demanding
their money now, losses in one institution
are less likely to damage others.
If poorly regulated, however, shadow
banks can be as dangerous as the better-
lit sort. One of the principal culprits in the
financial crisis was the "structured invest-
ment vehicle," a legal entity created by banks
to sell loans repackaged as bonds. These
were theoretically independent, but, when
they got into trouble, they pulled in the
banks that had set them up.
Another source of instability was money-
market funds, through which firms and
individuals invested spare cash for short
spells. These had been thought of as risk-
free. When it became apparent that they
were not, they suffered a run.
The disaster taught regulators useful les-
sons. The shadow banks that caused the
biggest problems had either big maturity
mismatches or not enough capital to absorb
losses. Most troublesome of all were those
whose difficulties infected the banks, because
the banks either had lent them money or
had provided them with a backstop of some
kind. Not surprisingly, the shadow banks
that were created solely to take advantage
of a less-exacting regulatory regime turned
out to be every bit as fragile and dangerous
New regulations in many countries aim to
make such shams impossible. Banks now must
incorporate structured investment vehicles on
their balance sheets, for instance. Money-
market funds must hold more liquid assets,
to guard against runs. Limits on leverage have
been imposed or are being considered for
many forms of shadow bank.
As Carney s anxieties suggest, though, the
job of making shadow banks safe is far from
complete. For instance, American regulators
still are allowing some money-market funds
to create the impression that an investor cannot
lose money in them. They should be forced
to be more honest.
The bigger danger lies in China, where reg-
ulatory arbitrage is happening on an alarming
scale. Banks there are banned from expanding
lending to certain industries and from luring
deposits by offering high returns.
As a result they do both of these things
indirectly, through shadow banks of various
sorts. Meanwhile some firms are setting them-
selves up as pseudo-banks: One shipyard
makes a third of its money from finance.
It is hard to imagine that all the shadowy
loans to unprofitable steel mills and overex-
tended property developers will pay off.
Nonetheless, investors are being encouraged
to pile in by a series of bailouts that so far
have shielded them from most of the harm
when such loans have soured.
This is a crisis in the making. It will not
bring down China, because the government
can use state-owned banks to temper its
effects, and it has enough cash to spend lavishly
to set things right. It still could cost a great
deal, however. The sooner the regime spells
out which assets are protected, the sooner
investors will take more care about risk.
Shadow banking can make finance safer,
but only if it is clear whose money is on
@2014 The Economist Newspaper Ltd.
Distributed by the New York Times Syn-
Big data vs
Lure of shadow banking
The most eye-catching signatory to
the accord is Switzerland, whose
banks were at the centre of the
scandals that gave rise to the Tax
Compliance Act. The world's most
famous offshore wealth-management
centre was built on supposedly
ironclad bank secrecy,
but it has been forced to buckle
under international pressure.
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