TAX NEWS - JUNE 2010
Bank Tax: Finance ministers scrap plans for global bank tax
The ministers ended a two-day meeting in Busan, South Korea, on Saturday that was held to review progress on a string of initiatives aimed at making the financial system safer in the wake of the last year's global collapse.
A bank tax, a measure pushed for by the United States, Britain and France, would have imposed a levy on all global financial institutions. All three countries spent billions of taxpayer dollars to rescue their largest financial institutions after the fiscal crisis of late 2008.
The money would have been redistributed into a fund to serve as insurance against a future financial crisis, or into the general revenues of national governments.
Options put forward by pronponents of the idea included a tax on bank profits or a levy proportional to banks' liabilities — meaning banks carrying more debt on their balance sheets would have had to pay more.
However, attempts to introduce the global levy were finally scrapped this weekend after opposition continued to come from Canada, Japan and Brazil — countries whose banks needed no public bailout during the worst financial crisis since the 1930s.
"It was apparent again in our meetings that most G20 members do not support the concept of a universal levy," Finance Minister Jim Flaherty told reporters after the meeting Saturday.
"The situations of countries that did not require government interventions in their systems is different from those that did, and there are a range of policy approaches for dealing with the risk of bank failures."
Canada's government had argued that tightening regulations by which banks operate would eliminate the need for bailouts in the first place.
Canada's opposition to the bank tax was based on some key points:
- The tax would penalize countries that did not bail out their banking system. Banks in these countries would be forced pass on the cost of the tax to clients, resulting in higher financing costs.
- And the levy could create so-called moral hazard, in that banks would continue the type of risky lending new regulations are suppose to prevent, with the knowledge that authorities have money available to help the financial sector in times of trouble.
In their communique, the G20 said they recognized there was a range of policy approaches and that they will approve a set of principles on how to protect taxpayers later this month at the G20 meeting in Toronto.
Canadian officials had turned up the pressure against the bank tax ahead of the G20 leaders' summit in Toronto to avoid the bank tax debate dominating discussions.
A day earlier, Prime Minister Stephen Harper had said that regardless of the outcome on the bank-tax debate, the politicians' main goal was to ensure that taxpayers, in Canada or elsewhere, will never be on the hook to bail out big banks.
"We have to make sure that we don't increase risk by sending the message to the financial sector that the taxpayers will underwrite their bad decisions," Harper said. "The proposal for a bank tax is a proposal to deal with that problem. In Canada, we took a different approach. We instituted an extremely tough regime of regulation."
British Finance Minister George Osborne, however, reiterated his pledge to introduce a U.K. bank tax regardless of what other countries do and said he will spell out his plans in a budget report on June 22.
"Different countries will do different things but to have it under the umbrella of the G20 is going to be helpful," Osborne told reporters.
Britain was forced to shore up the banking sector and rescue several individual firms as a result of the financial collapse.
The European Commission, among the levy's strongest supporters, announced last week it was prepared to implement a bank tax in Europe whether the G20 was onboard or not — a sign EU policymakers realized a global levy was not happening.
Those at the meeting did not agree any new regulation or alter deadlines for implementing the steps agreed to last year.
But ministers sought to keep plans for tough new Basel III bank capital and liquidity rules on course for implementation by the end of 2012 despite deep-seated concerns among several countries.
"We are on track to deliver the proposals at the Seoul summit in November. Ministers are fully engaged in finding the right compromises," Financial Stability Board chairman Mario Draghi told reporters.
Several finance ministers signalled that a lengthy phase-in for Basel III beyond 2012 was now inevitable.
Draghi, who overseas implementation of the G20's financial reform pledges, said Basel was not expected to take full effect by that deadline.
Canadians lenders have expressed concerns as to whether the new Basel rules will recognize government-backed mortgages.
An early draft of the version from Basel failed to take into account Canada's unique mortgage market, which involves Ottawa backing the insured home loans issued by the banks.
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