FRANKFURT (MNI) – Bundesbank executive board member Andreas Dombret
Thursday reiterated his concern about the introduction of a European
financial transaction tax on banks.

Speaking at an event in Berlin, Dombret said that focusing on
projects such as a financial transaction tax was an unwelcome
distraction from what was needed to achieve a stable monetary union.

“From the perspective of financial stability, its benefits are not
clear, while the potential negative effects are often overlooked,” he
said, adding: “it is quite possible that a [financial transaction tax]
might increase market volatility rather than reduce it.”

Dombret said such a tax would only be effective if it were
introduced internationally, but hee said this would be very difficult to
achieve in countries outside the EU, so that it would create an unlevel
playing field.

Dombret also called for quick implementation of Basel III at an
European and international levels in order to strengthen the financial
system. He said the introduction of new capital requirements would help
make the banking system more stable.

He said proposals to regulate the shadow banking system, discussed
at the G20 meeting in Paris and also expected to be addressed at the
next G20 summit in November, were on the right track.

Dombret said a stable financial system is an important basis for a
stable currency union, but to achieve this, the concept of monetary
union must be reformed.

This, he said, could be achieved first by strengthening the
existing institutional framework, and secondly through the
centralization of fiscal policy — ie, by creating a a fiscal union.

He said the institutional framework could be strengthened by three
key measures: strengthening the so-called no-bailout principle; giving
the Stability and Growth Pact more clout; and providing the monetary
union a permanent crisis mechanism.

However, Dombret said the strengthening of existing rules should
not open the door to “perverse incentives.” This, he said, is especially
true in the design and implementation of any future crisis mechanism.

“The devil is too often in the detail, and this may result in
mistakes,” he warned.

Turning to Greece, Dombret said there was a need for greater
clarity on its future. He said pre-conditions for rescue loans had to be
met and failing this, a default should not be excluded.

Dombret also called for greater clarity regarding the
recapitalisation of the banking system, blaming a lack of transparency
for the current breakdown in trust within the financial sector.

The Bundesbank official urged EU leaders to allow the credit rating
of the European Financial Stability Facility to drop below AAA status,
arguing that this would cost taxpayers less than if the EFSF’s firepower
were boosted through leverage.

He said that allowing the EFSF’s rating to fall below AAA would
effectively increase its lending capacity by around 50%.

–Frankfurt Bureau +49 69 720 142; email: frankfurt@marketnews.com–

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