Source: The Canadian Press

Bank of Canada governor Mark Carney is urging G20 countries to reject calls for a new bank tax at their next meeting in Washington later this week as they tackle a critical reform of the world’s financial system.

Canada’s top central banker, who will be participating at the meetings Friday and Saturday along with Finance Minister Jim Flaherty, said the G20 nations have far more important work to do than a bank tax — and shouldn’t be diverted by it.

“We see the bank levy discussion as a distraction from the core agenda,” Carney said Thursday at an Ottawa news conference.

“What we are trying to do is reduce the degree of excessive risk taking in institutions,” he added. “We would say the more direct way is to use what we’ve used in Canada, which is better leverage ratios, better capital standards, to introduce a liquidity standard … That is a better way.”

Still, Carney said the controversial measure won’t derail reforms because he believes there is no need for unanimity on the issue.

Flaherty has categorically rejected the proposal of a bank tax, which is favoured by European nations and the United States.

The idea behind the new levy is to create a fund held by governments that could be used if banks fail in the future, so governments won’t dip into taxpayers pockets for the funds.

But some critics say the true impetus is to exact punishment on banks and financial institutions whose risk-taking led to a market meltdown in the second half of 2008.

Several countries, including the United States, Britain and Germany but not Canada, had to dig deep with government bail-out packages in the billions of dollars.

In public comments last week and this week, Flaherty noted that Canada’s banks did not fail and shouldn’t be punished for something others did.

Flaherty and Carney say the tax won’t achieve its stated purpose in any case because most likely governments will just put the money in general revenues, rather than set it aside.

“It may not be there when the rainy day comes,” Carney said.

Canada’s view is that a better idea is to require banks create a contingency fund they would set aside and could dip into in times of future stress or crises.

Carney said the G20 is making progress on banking reform, although he said it is unlikely proposals will be ready for a sign-off at the leaders’ summit in Toronto in June. A more realistic target is the November return summit in Korea, he said.

In Washington, finance ministers and central bankers will be looking at proposals to raise the amount of capital financial institutions must hold relative to their loans, as well as other initiatives to limit excessive risk-taking.

Carney said the bank levy will also be discussed, especially after the International Monetary Fund recommended that one be adopted in a report issued this week.

But unlike minimum capital requirements, a bank tax is not something that needs unanimity, the governor said.

“There is absolutely a requirement for minimum common standards … on the basics of bank capital standards and the basics of bank liquidity standards,” he explained.

“With respect to bank levies different countries are going to go different ways. I fully expect there will be countries such as Canada that do not introduce a form of bank levy.”