TAX NEWS - June 2010
Canadian bank tax alternative `attractive' but unlikely to be adopted
"It sounds attractive, and it sounds attractive to me, but for some reason it never gets much traction," the former Federal Reserve chairman said Wednesday, noting that the idea was discussed at least as far back as during a banking crisis in the 1980s.
Finance Minister Jim Flaherty has championed the idea of requiring banks to hold embedded contingent capital, or debt that would convert to equity in an emergency.
"If someone wanted to experiment with it, I would say, 'God bless them,''' Volcker told reporters after addressing an economic forum.
But one of the problems with the approach is that the market for this debt could become overly constricted and reduce its attractiveness, he said.
Banks in dire straights may also be so strained that converting its debt may come too late, added Volker, 82, an economist and a key economic adviser to U.S. President Barack Obama.
"It might make the funeral a little different but it's going to be a funeral anyway."
Volcker added that he'd also be very surprised if a uniform international tax on banks gains approval.
Canada has opposed the levy because its banking system escaped the global financial crisis relatively unscathed and didn't require financial intervention by government.
Volcker said the proposed financial regulations being debated in the United States could serve as a model for reform around the world and are unlikely to be damaging for Canada.
"Some of the banks will be somewhat constrained in proprietary trading if that's what they're doing. I don't think that will kill them anymore than it will kill the American banks that are involved in proprietary trading."
Earlier, Volcker told the business audience that he's optimistic the proposed U.S. reforms will survive relatively intact despite massive lobbying from the banking industry.
"This is a battle. Make no mistake about it," he said. "But I do think that if we can get this bill passed in a reasonable form, and the prospects to me look pretty good, I think that we'll provide a basis for the other major countries to get together in a way that wasn't possible before."
The proposed changes, dubbed the "Volcker Rule," would restrict banks from making speculative investments that are not on behalf of their customers. They would also be prevented from owning or investing in a hedge fund or private equity funds.
Volcker said he opposes exemptions to his rule being proposed by banks that would "unduly weaken it."
He said that traditional approaches being debated by world leaders that would require common standards on capital requirements and tighter leverage limits would not be fully effective in averting another crisis.
Pushing that strategy too far risks putting financial institutions in straitjackets by extinguishing the profitability and initiative of the institutions themselves.
"We need some guideposts here, we need some structure," he said, referring to legislative direction that includes hard rules to help supervisors maintain market stability.
Meanwhile, the economist said the global recession that erupted in late 2008 was not normal by historical standards and so the recovery won't be normal.
"It's going to be a considerably long slog," he said, adding that unemployment won't fall quickly and high government budget deficits will continue to restrict growth.
Volcker said Canada's healthy banking system justifies the "self-satisfaction" exuded by the country's politicians and others.
But while some of Canada's experience can be a model for the rest of the world, Volcker said he was not sure how much of the lesson is transferable.
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