Canada has won a key fight in its high-profile international campaign against a global bank tax as G20 finance ministers Saturday approved a plan that allows countries to manage the issue as they see fit.
Proponents of such a tax including the United States and Europe are free to go it alone, but the new plan allows the rest of the G20 to avoid the controversial idea and find other ways to reduce banking risks.
"The majority of the countries in the G20 do not support an ex ante bank tax, that is clear," Canadian Finance Minister Jim Flaherty said at a news conference following a two-day meeting of G20 finance ministers and central bankers.
"At the end of the day, different countries will chose different ways of reaching the goal [that banks should pay for government interventions]but there is no agreement to proceed with an ex ante bank tax," he said.
In their final communiqué, G20 finance ministers and central bankers said the financial sector must make a "fair and substantial" contribution to paying for any of the burdens associated with government intervention.
However, the statement then goes on to include wording that will allow most G20 members to avoid a bank tax, should they choose. For instance, the requirement for banks to pay back government aid is limited to those countries that actually bailed out their banks. There is also wording allowing countries to choose from a "range" of policy options in this area that take into account their own individual circumstances.
Europe and the United States are the main proponents of a bank tax - partly to recoup taxpayers' money used to bail out banks during the recession. But the European Union and the United States have also argued that it is in the interests of all G20 countries to create a fund via a global bank tax so that governments aren't on the hook again to cover the huge costs of protecting vulnerable banks in a downturn.
Japan's Deputy Finance Minister Naoki Minezaki and Australian Finance Minister Wayne Swann also spoke out publicly against the tax here this weekend. The G20 leaders will receive a second International Monetary Fund report on the proposal when they meet in Toronto, but it is clear there will be no broad agreement for joint action on a bank levy.
The decision to make the bank tax voluntary for G20 members is essentially what Canada, through Mr. Flaherty and Prime Minister Stephen Harper, have argued in recent weeks as the two men blitzed key the world for face-to-face meetings with key G20 members including the E.U., China and India.
On the complex issue of banking reforms - including a common definition for high-quality capital and the percentage of capital banks should have on hand - the G20 has agreed that a plan will be announced in November when leaders meet in Seoul.
Banks generally resist higher capital requirements because it cuts into profits. But many G20 leaders say sorting out this issue is the most important way governments can prevent the kind of risky practices that were at the root of the financial meltdown.
Agreement is proving a challenge however because the United States, Europe and Asia currently have dramatically different rules on what qualifies as Tier 1 capital and how banks can leverage money.
U.S. Treasury Secretary Timothy Geithner said the G20 is focused on a finding agreement in time for the November meeting of G20 leaders in Seoul in November.
The United States is moving aggressively to fix the things we got wrong and to strengthen our economic fundamentals and we will give our full support to the G20 agenda of growth and reform. U.S. Treasury Secretary Timothy Geithner
Mr. Geithner also warned that the G20 should not count on American consumers to fuel an economic recovery.
"Within the G20, we discussed how the ongoing shift toward higher savings in the United States needs to be complimented by stronger domestic demand growth in Japan, in the European surplus countries and by sustained growth in private demand, together with a more flexible exchange rate policy in China," he said.
The G20 includes the G7 countries of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States as well as Argentina, Australia, Brazil, China, India, Indonesia, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey and the European Union.