Wednesday, April 14, 2010

More Flaherty bafflegab

On the one hand: "Flaherty tells G20 bank tax won't work, says it could encourage more risk-taking." See, the problem is if you call it a "bank tax," the Conservative p.r. manual kicks in. Big no-no to support a bank tax or a tax of any kind, no matter how prudent it is. The rest of the G8 looks to be moving in that direction. Let's check in on Jim's latest:
The idea of taxing banks has been gaining steam in Europe and the United States as a means of penalizing institutions that triggered the global recession and of creating a cushion against future crises.

But Flaherty says a bank levy might actually encourage what regulators seek to punish - more risk taking by bankers who believe governments would feel bound by the tax to bail them out in case of future failures.

The Canadian finance minister says there are better ways of achieving the same result and has proposed an insurance fund against system risk termed "embedded contingent capital."
Oh, I see. An insurance fund. Now who would that be funded by? The banks? In which case, wouldn't we call that a tax? Hmmm?

Fun fact, they've moved away from the notion of an insurance fund in the U.K. because they believe that would indeed encourage the risk taking aspect that Jimmer is so worried about: was "a big shift for Alistair Darling to say that he favours a tax on some measure of the risks being taken by banks, as opposed to introducing an insurance premium on them to meet the costs of future bail-outs".

Treasury sources say Mr Darling favours a tax over an untouchable insurance premium because he fears that banks could feel they were insured against the consequences of their actions and take even greater risks.
Even Tory leader David Cameron is supporting a bank tax over there in the U.K.

So is Jim a day late and a dollar short with his insurance fund proposal? Is the G8 passing us by as Jim mumbles about such matters? Looks like it.

Update (7:50 p.m.): All right, the above needs this amendment. Details on Flaherty's proposal, apparently this is some kind of self-funded mechanism:

In his letter to his G20 peers, he asked them to consider an alternative put forth recently by Julie Dickson, Canada's chief bank regulator, whereby financial institutions insure themselves against failure by issuing debt that can be converted into equity at times of trouble. Ms. Dickson called the scheme "embedded capital."

"I think we are taking a leadership position on this because we are putting forward an alternative to a bank tax or levy," Mr. Flaherty said, hinting that a number of G20 countries might side with Canada in its fight.

That's interesting, and a little different from a premium, but whether the G20 is liable to go for a self-financing regime, i.e., leaving it in the hands of the banks, after what has occurred is another question.