Paul Martin says Harper’s anti bank tax campaign a ‘diversion’

Instead, Harper should take advantage of his time in the international spotlight to push for stronger rules for banks and financial institutions, says Martin.

The prime minister’s high-pitched focus on fighting the bank-tax proposal distracts from the urgent need to get G20 agreement on better financial regulation, Martin said in an interview.

He said he sees the tax proposal as a way of shifting attention from the need for tougher rules.

“I think the bank tax is a diversion,” Martin said. “Not by Canada, but by a lot of other countries. And I don’t think we should allow ourselves to be diverted off the main course.

“If what you want to do is prevent further bank crises, then certainly the first line of attack is bank capital, liquidity and leverage.”

In a press conference Tuesday, Industry Minister Tony Clement agreed that the bank tax is a distraction, but defended the government’s efforts as leadership on a key economic issue.

And he said Canada and other anti-tax nations are under pressure to go along with Europe and the U.S. — where banks failed and had to be bailed out by government.

“Those who advocate for a this tax, are not saying, ‘The United States must do this or the U.K. must do this.’,” Clement said. “They are saying globally as G20 countries … this is something that has to be applied regardless of individual circumstances.”

In a teleconference call with reporters from India, Finance Minister Jim Flaherty said he does not expect there will be agreement on financial system reform at the G20 meetings in Toronto in June. He said a more realistic target is the November meetings in Seoul, Korea.

And he doubted the bank tax would be part of the final package.

“Quite frankly, it’s an idea that is not going to obtain the kind of universal support that perhaps some thought it would,” he said.

Flaherty added he is currently in the process of detailing to his G20 counterparts Canada’s substitute proposal that would force banks to hold a reserve of “contingent capital” as insurance against future failures. The key difference between the two proposals is that under Canada’s measure, banks would retain the money on their books, rather than governments.

“That has some support” in the G20, he said, without naming which nations are backing Canada.

The full-court press on the bank tax Tuesday is a clear indication the Canadian government is under pressure to go along with the big economies in Europe and the U.S.

Five Harper ministers delivered essentially similar messages at public events around the world — Flaherty in Mumbai, Trade Minister Peter Van Loan in Washington, Treasury Board President Stockwell Day in Shanghai, and Clement, flanked by Foreign Minister Lawrence Cannon, in Ottawa.

The European Union and the International Monetary Fund, among others, say a bank tax would produce a pool of money that could rescue failing banks and reduce the chances of a major banking collapse in the future.

Ottawa has argued that the tax would punish Canadian banks for their solid performance during the financial crisis of the last couple of years. That argument has carried the day at the G20 so far.

Bank of Montreal economist Douglas Porter says the concern in Europe and Washington is that Canada and some other anti-tax countries would gain a competitive advantage if the bank duty is not global.

Martin says he agrees with Harper that such a tax should not be imposed indiscriminately by the G20. But such discussion is beside the point, he said.

Canada has proven that robust rules on banking reserves and liquidity ratios can help financial institutions withstand a crisis, Martin said, and that message needs to be spread now, loud and clear.

“This is the fundamental issue” in preventing future crises, Martin said. “That’s where Canada should really now be showing leadership.”

It’s a natural cause for Ottawa to champion, since Canadian officials have been at the forefront of G20 talks on the subject since 2008, and since Canada’s banks are a shining example, Martin added.

Already the G20 has spent 18 months tossing around different variations of new banking regulations. With the debt crisis in Europe threatening to spread, the G20 needs to make up its mind by this fall at the very latest and implement the new rules before its too late, Martin said.