Bank tax push gains speed

Three of Europe's biggest economies have thrust the bank levy debate back on to the global agenda despite Canada's best efforts to kill it, a move that threatens a showdown at the Group of 20 summit.

The effort to slap an additional tax on banks picked up momentum on Tuesday when the British government's emergency budget announced its intention to proceed with such a move - worth £2-billion ($3-billion) a year - and France and Germany announced that they plan similar proposals.

The issue promises to be a divisive one at the summit this week given the European alliance and the heated opposition to such a levy by countries such as Canada. The idea for such a tax was believed dead after G20 finance ministers met in South Korea earlier and backed away from such a proposal.

It's yet another challenge for the summit, which will also be grappling with a plea by the United States that world leaders not put the global recovery at risk through widespread cutbacks.

European governments are in the midst of such austerity measures to bring their finances under control, while Canada, the host country, has also urged deficit targets.

British Chancellor of the Exchequer George Osborne's decision to tax total bank liabilities at 0.04 per cent beginning in January, rising to 0.07 per cent a year later, did not rattle investors, who had expected a higher figure. But it was dismissed by some tax accountants as political pandering and by bankers as harmful to an industry that is only just recovering from a crisis that nearly destroyed it.

The British Bankers Association fears British banks and their foreign subsidiaries will be hit with overlapping levies, hurting their ability to compete, as they are introduced in various countries.

"Bank levies need to be co-ordinated internationally: they must not prevent the industry in the U.K. from being able to compete," the association said. "It is essential that the international banks do not find themselves taxed multiple times for the same thing."

The British government will consult with banks before the levy is introduced. But in his maiden budget only weeks after the general election, Mr. Osborne gave no hint he would back down.

"This was a crisis that started in the banking sector and the failures of the banks imposed a huge cost on the rest of society," he said. "So it is fair and right that in future, banks should make a more appropriate contribution which reflects the many risks that they generate."

He got moral support from France and Germany, which announced their intention to introduce levies to offset the cost of any future banking crises. In a joint letter, French President Nicolas Sarkozy and German Chancellor Angela Merkel urged the G20 countries to come to an "international agreement to introduce a levy or tax on financial institutions to ensure fair burden-sharing and create incentives designed to contain systemic risks."

Britain, France and Germany also raised the possibility of bank taxes beyond the levies. Mr. Osborne said Britain will consider taxing bank profits or compensation payouts. The French and German letter mentioned the possibility of "an international agreement on a global financial market tax," which is code for a tax on financial transactions.

Canada has strongly opposed bank levies and has received support from Russia, China, India and Australia in its effort to use other methods, such as tougher capital requirements, to make banks less prone to accident.

Canada argues that Canadian banks, considered among the healthiest in the world, should not be punished for their success. It also cites moral hazard - the existence of a levy-financed fund to pay for future bank bailouts could, it believes, tempt banks to take higher than usual risks - and it reiterated its opposition after the European announcements.

"As far as Canada and other like-minded countries are concerned, we will not put in place a bank tax," said Dimitri Soudas, a spokesman for Prime Minister Stephen Harper. "We're in a different situation, but we are looking for a way that we can find an agreement on the general principles that various countries are trying to pursue when they propose a bank tax."

The Canadian Bankers Association was also quick to oppose the effort for an international agreement on bank levies. "What is important is stability in the financial sector and good risk management," the CBA said in a statement. "You don't get this by imposing a tax on financial institutions."

International agreement is far from certain. In Europe, for instance, there is broad disagreement over where the funds from the levy would go. Some countries, such as Sweden and Germany, would like the funds to be "ring fenced," or set aside for future bailouts and others think they should count as general government revenues.

With files from reporters Jeremy Torobin and Tim Kiladze.