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Finance Minister Jim Flaherty (Mark Blinch/Reuters)
Finance Minister Jim Flaherty (Mark Blinch/Reuters)

Globe editorial

Flaherty is right to travel in defence of Canada's banks Add to ...

Jim Flaherty, the federal Minister of Finance, is right to be engaging in international diplomacy, in order to resist the proposal for a global bank tax.

The United States and Europe, where governments had to spend large amounts of money rescuing a number of banks in the financial crisis of 2008-2009, are favourable to this idea. But Canada's banks should not suffer for sins they did not commit and they should not have to pay taxes that would amount to compulsory insurance premiums for the risk of losses they are most unlikely to incur.

Mr. Flaherty and his colleagues are wisely looking elsewhere for allies in the G20, in preparation for the June summit. Asia did not have to bail out banks, so Mr. Flaherty is in India, and Stockwell Day, the President of the Treasury Board, is in China for the Shanghai world's fair.

Canada is not simply immune to bank failure. It happened here in the 1920s, and again in 1985, with the Northland Bank and the Canadian Commercial Bank - not to mention the failures of several "near banks" such as trust companies. Julie Dickson, the head of the Office of the Superintendent of Financial Institutions, pointed out that history in a speech last month, and warned, "Banks should not assume that G20 countries will simply adopt Canadian rules and call it a day."

Rather, she is advocating "embedded contingent capital," and Mr. Flaherty has taken this message to India. Instead of a systemic-risk fund based on the proceeds of a global bank tax, such as many others are endorsing - a kind of insurance policy that could increase the all-too-comforting expectation of bailout - Ms. Dickson and Mr. Flaherty propose a reform that builds in market discipline. Banks would issue debt instruments that would be converted into shares in the event of a crisis, thus maintaining capital, while diluting the interests of the existing shareholders.

The Greek fiscal crisis has awakened justifiable fears of sovereign defaults, and banks - as creditors of some shaky sovereign states - are charging each other higher interest rates in consequence. This renewed consciousness of bank instability should not result in the imposition of new tax burdens, but in the prudent, market-oriented reforms that Jim Flaherty and Julie Dickson advocate.

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