Toronto: Canada is building up global opposition to a global bank tax ahead of next month’s Group of Twenty (G-20) meet.
At a national youth caucus held in Ottawa on Monday, Canadian Prime Minister Stephen Harper said, “You can’t tax a financial system into stability.” He was responding to the proposed tax on banks by the US and the EU, which will be one of the items high on the agenda at the meet. He said there was no reason for countries that had strong banking systems relatively unaffected by the financial crisis to toe the line for a global bank tax. Instead, he said that regulators should insist that banks invest more prudently and have higher capital to loan ratios.
Harper said that Canadian banks, which have been unaffected by the crisis, were denied the opportunity to make high profits during the boom years because of tough regulations, and hence they should not be burdened with tax. He pointed out that banks in emerging economies, too, were not affected and that “strong and active regulation” rather than a tax on banks was the solution.
Canadian finance minister Jim Flaherty has been drumming up support for Canada’s position, opposing the global bank tax in New Delhi, pointing out that banks in both India and Canada have been relatively unscathed by the crisis and should not be made to pay for the mistakes committed by banks in less tightly regulated countries. Canadian treasury board president Stockwell Day is in China making a similar argument there.
Apart from tighter regulations, Canadian authorities are also proposing that banks be allowed to raise “embedded contingent capital” that would act as a buffer during a downturn. Essentially, the proposal would require banks and financial institutions to raise debt that could be converted to reserves when the bank faces capital constraints. The Canadian counter-proposal is in response to the US and the EU plan to impose a bank tax so that the burden of supporting banks during a crisis falls on the banks and not on the taxpayers. The International Monetary Fund is also backing this proposal.
On the G-20 summit, Harper called for world leaders to show genuine progress on the commitments already agreed to at earlier summits and said that restructuring financial institutions and improved regulation of the financial ystem were very high on the agenda.
Manas Chakravarty is in Toronto as a guest of the Canadian government.