G-20 eyes taxpayer protections from big bank failures

By Ronald D. Orol

MarketWatch (MCT)

TORONTO, Canada – Leaders of G-20 countries were working Sunday to reach an agreement on creation of systems to dismantle failing mega-banks so taxpayers won’t be forced to pay for the collapses, a Canadian regulator said.

The leaders will seek an agreement on having each country create a system to dismantle a failing super-sized Lehman-like institution so its collapse doesn’t unsettle the markets, said Tiff Macklem, the Canadian Finance Department’s point man on international summits.

“Leaders must not waiver from introducing effective resolution rules for troubled financial institutions in line with principle that taxpayers should not pay for the cost of failures of financial institutions,” he said at a press conference on Sunday.

How each country achieves that is a key question.

One controversial approach, supported by some European countries but opposed by Canada, would be to collect fees from big banks to create a fund that would be used to dismantle a failing super-sized Lehman-like institution so its collapse doesn’t unsettle the markets.

The fund could be used during a crisis to make capital injections into “healthy” counterparties of a failing big bank so they don’t fail as well. The goal is to keep a minimal credit crunch from transforming into a global financial disaster. Macklem added the leaders are seeking a resolution on improving the quality of bank capital, strengthening liquidity standards for big banks and achieving common restrictions on leverage.

Also, G-20 countries are on the verge of reaching an agreement on common goals for deficit and debt reduction, a European regulator said late Saturday.

“The fact that the G-20 probably will be ready to accept some targets for deficit reductions and debt reduction is very encouraging,” European Commission President Jose Barroso told reporters.

“I am encouraged by fact that there is a convergence about setting these minimum requirements on deficit and debt reduction. We expect it to be approved tomorrow.”

Barroso said the European Commission supports Canadian Prime Minister Stephen Harper’s proposal to have advanced economies of the G-20 member countries cut their deficits in half by 2013. He also expressed support for Harper’s proposal to have countries stabilize their government debt to Gross Domestic Product ratios, by putting them on a downward path, by 2016. G-20 observers contend the U.S. may be the largest obstacle to reaching a common consensus on deficit and debt reduction.

President Barack Obama warned fellow G-20 leaders in a letter last week not to withdraw fiscal stimulus and hurt a burgeoning recovery. However, U.S. Treasury Secretary Timothy Geithner disputed assertions the U.S. is seeking a different fiscal direction for G-20 countries.

“If you look at the rest of the major economies you see more in common than different,” Geithner told reporters on Saturday. He added the U.S. announced measured path for deficit reduction over the next three years is actually more forceful that Germany.

“If you look at the announced measured path of deficit reduction for the US for the next three years relative to what the leaders are considering are appropriate for Germany.

“Look at the announced measured path of deficit reduction for the United States of America over the next three years relative to what the leaders of Germany are considering appropriate for Germany,” Geithner said.

“And if you look at those together, you’ll see ours is much steeper, appropriately so.” The Obama administration’s budget for 2011, released in February, anticipates a deficit of $778 billion in 2013, roughly half of the $1.6 trillion deficit the White House estimates for 2010. Should the estimates hold up, the reduction meets the deficit reduction goals under consideration by the G-20 summit.

Leaders are seeking to reach agreements in time for a November G-20 summit in Seoul, Korea, on creating common standards for the amount and quality of capital big banks would need to cushion themselves against financial crises.

According to excerpts from a draft communique obtained by MarketWatch, new capital requirements would be phased in based on different “national standards and circumstances.” Bank of Canada’s Carney argues that, instead of bank fees, setting global standards among G-20 countries for capital and liquidity is a better way to avert future financial crises.

“Our view is the most effective way of doing that is to get capital right and get liquidity pools right, how much cash do they have on hand to meet their obligations, you get those two right, that’s the core of the system, that’s what we’re working on and that’s what we’re making progress on that,” Carney said.

“If you get that right plus some adjustments for how markets operate, you don’t need a bank tax.” Barroso said he hoped Europe and other G-20 countries could come to a common agreement on bank capital levels.

“Our goals on capital are more ambitious that in other parts of the world. We hope will agree on some general principals, but certainly we are in favor of increasing the quality of bank capital,” Barroso said. Barroso added Europeans are pressing for discussions to continue about creating a global tax on banks and financial transactions to help pay for the costs of financial crises, despite opposition to the two measures from other members of the G-20 led by Canada.

He added the European Commission agrees with a basic proposal by the International Monetary Fund that calls for two types of taxes on financial institutions to prevent and pay for future crises. One approach would be to collect funds from big banks to create a fund that would be used to dismantle a failing super-sized Lehman-like institution so its collapse doesn’t unsettle the markets.

The fund could be used to make capital injections into “healthy” counterparties of a failing big bank so that they don’t fail as well. The goal is to keep a minimal credit crunch from transforming into a global financial disaster.

“In the European Union we decided to raise the issue,” Barroso said.”We cannot anticipate a conclusion on financial transaction tax.”

European Council president Herman Van Rompuy said if there is no consensus on a bank levy in Toronto, the European Union will proceed on its own. Bank of Canada President Mark Carney argues Canada is opposed to a global bank tax and bank fund, in part, because it gives the impression big financial institutions will be rescued when a crisis hits.

“If you put one in place you implicate that you will come back and rescue these institutions,” said Carney in a radio interview. “You have a safety net for them. You need to have a system in place so that institution could be put to bed if it fails.”