Before our government persuades the G20 to nix the proposed global bank tax because our institutions are so solid that they need no shoring up, let's remember that Canadian banks can fail, too.
As recently as 1985, two western banks, the Northland Bank and the Canadian Commercial Bank, teetered on the brink of collapse, plagued by bad management and tough economic times. The consequences of their failure would be many times more critical than shareholders losing investments. But the kind of fund this bank tax would finance did not exist.
I attended an emergency caucus of recently elected Progressive Conservative MPs, where we were told that the governor of the Bank of Canada had been on the phone to the minister of finance, urging action.
If these banks were to fail, the governor was quoted as warning, "it will send shock waves through the whole financial system." Although deposit insurance would protect individual depositors, other ordinary citizens were threatened. Western pension funds had been persuaded to take their business to western banks, and their ability to supply their pensioners was now in jeopardy.
The message was clear. There had not been a bank failure in Canada since 1923, and people had assumed our system was failsafe. Now we were learning it could get into precisely the same trouble as American banks.
What could MPs do but follow the minister, who was following the governor? The reputation of our banking system had to be saved in order to maintain the country's fiscal stability. The income of pensioners depending on a monthly cheque had to be protected.
So Parliament was persuaded to bail them out, with assistance from the Canada Deposit Insurance Corporation and some other chartered banks - another example of corporations being capitalistic on their way up, but socialistic on their way down. If they could be smug about individual responsibility in good times, they were not too proud to become welfare cases in hard times.
But it wasn't enough. Before the year was out, both banks had failed.
That was a quarter of a century ago. Does it mean Canada should go with the bank tax proposal now? Not if there is a better alternative. But we should not be eager just to protect our banks against a tax intended to fund possible future bailouts. If not a bank tax, the Canadian government should recommend a better alternative.
After what happened on a small scale in 1985 and on a tsunami scale in 2008, government cannot become the permanent "fall guy" for the banks. The financial institutions have an aggressive lobby looking out for them - we should expect the Minister of Finance and MPs to be an even more aggressive lobby for Canadian taxpayers. Government's lack of preparedness in 1985 cannot justify the same today.
Reginald Stackhouse is principal emeritus and research fellow at Wycliffe College, University of Toronto.
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