Credit Suisse predicts more volatility and illiquidity under transaction tax

Swiss bank Credit Suisse has warned volatility could rise, and liquidity fall, if plans of the president of the European Commission to tax many EU financial transactions go ahead.

The 10bp levy on secondary market share and bond transactions EU-wide, and on derivative trades at 1bp, from 2014, was greeted with scorn by the London financial community, Conservatives and their compliant press this morning.

The €57bn raised a year from the tax on both sides of the transaction would pale into insignificance if the industry leaves the EU as a result, for America or Asia, they said.

But Credit Suisse warned in a note that the tax proposed yesterday by José Manuel Barroso would also be “very negative for volumes and hence market liquidity.

“For example we estimate that up to 40% of LSE volumes are driven by high frequency trading – an area of the market that would be particularly affected. As such we think that markets could become more volatile and revenues could undershoot estimates substantially.”

The analysts pointed to harm done by a similar charge levied in Sweden.

However, analysts at the bank also noted the tax might never be implemented, or only in a limited number of countries or after being “modified substantially”.

It was not likely to raise the €57bn mooted, they added, and any windfall would be”more than offset by the costs to GDP growth”, which would equate to €62bn.

“As such the financial rationale for the proposals is unclear. Further, when we try to square the top down €57bn revenue estimate with our bottom-up estimates of the revenues for the investment banks (pre the changes to funding costs that we are seeing at the moment) we cannot reconcile the numbers.

“In aggregate we have €82bn of investment banking revenues at European investment banks estimated in 2012 before taking into account the impact of higher funding costs. Furthermore, if there is an acceleration of restructuring in investment banking business models then clearly the proposals would raise a much lower level of income.”

Credit Suisse said it was “unclear” whether the proposal would win approval from all 27 member states. “The UK has indicated that is opposed unless agreement is reached on a global level. These proposals will be presented to the G20 in November, and we are unsure that they will be welcomed in all regions.”


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