Transcript Offshore Finance and the Netherlands

Offshore Finance, shadow
banking and the issue of
regulatory arbitrage
Rodrigo Fernandez
SOMO / KU Leuven
What is shadow banking?
a network of non-bank entities that
intermediate credit in a unregulated
market environment outside conventional
banking structures.
Why does it matter?
• ‘Back to the future’: banking from 18th
century, with 21th century technology
• no public backstop
• Credit creation is outside the scope of public
authority
• Unstable market
• Complex information asymmetries
• Lessons from the eurodollar markets
Selected global financial indicators,
Billions of Dollar, 2002-2010
120000
100000
80000
60000
40000
20000
0
2002
2003
2004
2005
2006
2007
2008
2009
GDP World
stock market capitalization
public debt securities
private debt securities
Bank assets
OFI assets
2010
What is an Offshore Financial Center?
“An OFC is a country or jurisdiction that provides
financial services to nonresidents on a scale that is
incommensurate with the size and the financing of
its domestic economy.” IMF 2007
“An OFC may be defined as a jurisdiction in which
transactions with non-residents far outweigh
transactions related to the domestic economy” Bank
of England 2001
Why does it matter?
OFC’s enable capital to move out of the regulated
environment of the nation state, which leads to:
Eroding the regulatory capacity of nation states
Re-scaling of finance
Regulatory arbitrage
Eroding the sovereignty of nation states
 Tax evasion
Tax avoidance
Top ten reporting inward FDI stock in 2011
3,500,000
Source:
3,000,000
Million of dollar
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
Size of OFI sector in the EU in 2010, in Billion of Euro
7000
6000
5000
4000
3000
2000
1000
0
Size of 'other intermediaries'in the Eurozone in 2010
5%
6%
27%
8%
Netherlands
Luxembourg
France
7%
Ireland
Spain
Italy
Germany
12%
Other
22%
13%
Grafiek 2. Compostitie van transacties van Nederlandse BFI's
12000
10000
Miljard euro
8000
6000
4000
2000
0
2004
2005
Deelnemingen
2006
Concernleningen
2007
2008
Effecten en derivaten
2009
Leningen van derden (banken)
2010
2011
Offshore Architecture of the ‘Holland Route’
 The London branch of the globally active bank acts as lead manager and
arranger
 The Dutch SFI is a shell company and formally acts as issuer of the notes
 A large Dutch trust firm is responsible for all local administrative tasks and
responsibilities that are related to a Dutch domicile and tax ruling
 Administrative functions related to the note program, are conducted by one or
more banks located in the UK
 The notes are listed on the exchanges of Ireland, Luxembourg, or both, but are
also sold OTC
Conclusion
• Tax avoidance and regulatory arbitrage are
embedded in the same offshore industry
• Difficult to disentangle financial from non
financial conduit structures
• Need to include problem of regulatory
arbitrage in debate on tax havens
Composition of the Dutch OFI sector
Assets
Financial SFI
Credit
regulatory
Part of financial
degree of shadow
intermediation
oversight/backstop
corporation
banking
indirect
Yes
substantial
no
Yes
low
500 partly
Non-financial SFI
1500 no
Finance company
128 yes
indirect
Yes
substantial
SPV
330 yes
no
Yes
very high
2 yes
no
Yes
very high
18 partly
no
Yes
substantial
MMF
Hedgefund
Invest. Fund
340 no
no
Yes
low
Invest. Trust
91 no
no
Yes
medium
Private equity
25 no
no
Yes
medium
184 no
no
Yes
low
14 no
no
Yes
low
Holding financial instit
Other