Banking Secrecy and Global Finance: Economic and Political by Donato Masciandaro, Olga Balakina

By Donato Masciandaro, Olga Balakina

In this booklet, the authors relate how the expansion of criminality systematically generates a requirement for banking secrecy.

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Extra resources for Banking Secrecy and Global Finance: Economic and Political Issues

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In fact: ∂E = u ⎡⎣ − mY + cY + γ 2Y − cY + tY 2 + γ 2Y ⎤⎦ ∂p ( ) = uY (−tY − m ) = − uY (tY + m ) < 0 ∂E = −upY 2 < 0 ∂t ∂E = u (1 − p )Y > 0 ∂m In other words, we find that the level of utility of the policymaker, and therefore of the BS country, declines if the probability of international sanctions and their severity increases. At the same time the level of utility increases while the expected return on the banking secrecy activity increases. 20 Banking Secrecy and Global Finance The policymaker must now determine the optimal level Y* of banking secrecy – bearing in mind the maximum resources that are available to him – given that the potential demand for banking secrecy is equal to W.

Banking secrecy profitability: the optimal degree of banking secrecy increases as the level of national benefits increases. Given: Y* = m (1 − p ) − c − γ 2 2 pt It is a function of the type Y = aX + b where a = ∂Y * (1 − p ) = >0 ∂m 2 pt It is worth noting that from: Y* = m (1 − p ) − c − γ 2 =0 2 pt −c − γ 2 1− p and b = 2 pt 2 pt Banking Secrecy: Economics and Politics 25 ⇒ m (1 − p ) − c − γ 2 = 0 ⇒m= c+γ2 (1 − p ) we obtain: Y* = mmax = mmax (1 − p ) − c − γ 2 =W 2 pt 2Wpt + c + γ 2 (1 − p ) The banking secrecy will therefore be positive if the profitability lies in the range of [mm, mmax].

The optimal policy is not derived from any social utility function. It is the result of the policymaker’s maximising process, based on its own political cost-benefits analysis. 6) The linear specification of the function of policymaker utility tells us that the policymaker is a risk-neutral agent. This utility function is consistent with our assumptions. In fact: ∂E = u ⎡⎣ − mY + cY + γ 2Y − cY + tY 2 + γ 2Y ⎤⎦ ∂p ( ) = uY (−tY − m ) = − uY (tY + m ) < 0 ∂E = −upY 2 < 0 ∂t ∂E = u (1 − p )Y > 0 ∂m In other words, we find that the level of utility of the policymaker, and therefore of the BS country, declines if the probability of international sanctions and their severity increases.

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