Strong opposition to Britain's global bank tax push came on Thursday from a Canadian central bank veteran, who said such a levy would not help prevent future crises and may be more about fixing fiscal deficits.
Bank of Canada Deputy Governor David Longworth, who retires at the end of the month, said in an interview with Reuters there was no clear reason to impose a global bank tax and that such a proposal was never part of the core agreement by the G20 group of leading industrialised and emerging nations.
"There was nothing on this in previous G20 agreements. It is not key to the regulation of the financial system and it's not clear that there needs to be an international agreement on this," Longworth said. Longworth chaired the Committee on the Global Financial System of the Bank for International Settlements, which issued its report this week. He has spent much of his 36-year bank career working on financial system stability issues.
Britain and Germany are pushing for a global levy on banks and hope finance officials agree on details at a meeting in Washington in April. The International Monetary Fund was tasked with studying options for protecting taxpayers from banks taking on excessive risk, and reporting back to the G20 next month.
British Finance Minister Alistair Darling told Reuters on Thursday that of the four options it proposed, attention was now focusing on some kind of global levy. But that there was no agreement yet. But for Canada the proposal is a non-starter. Prime Minister Stephen Harper's government, which co-chairs a G20 summit in Toronto in June, has vowed to block any global deal on a bank tax, largely because Canadian banks needed no bailouts.
Longworth said a tax does not make the system safer but leaders may have other reasons to impose one, whether to pay for past bailouts, pre-fund future ones or even reduce budget deficits. "In part, I think it's the fiscal problems that some other countries are having now. It's a big difference when your fiscal deficit is 10 to 12 percent of GDP as opposed to 3 or 4 percent," he said.
"It would be much better to set up a system where the probability the government would ever have to intervene to recapitalize banks is extremely small." The first step is to improve capital and liquidity requirements, he said, as well as devising ways for safely unwinding banks deemed "too big to fail". There will be a G20 agreement this year on the most urgent reforms on capital and liquidity, Longworth said.
"That, I think, is really at the heart of improving regulation and it will get done this year ... and the banks will know what the rules of the game are going to be." Longworth sees the G20 progressing on other thorny issues, like greater currency flexibility by China and tackling gaping deficits in the United States, if only out of fear of repeating the worst global crisis since the Great Depression. "We don't want a repetition of what's happened over the course of the last three years - that's the greatest incentive to getting things done."