Bank levy is lightning rod for debate inside G-20

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Bank levy is lightning rod for debate inside G-20

The words “bank levy” are likely to be repeated over and over in coverage of this week’s G-20 finance ministers meeting in Busan. What makes the idea of a bank tax so controversial that it’s been put off until over a year after the financial crisis erupted?

Simply speaking, because it could hurt consumers. Though details remain up in the air for now, many forms of bank tax may motivate financial institutions to pass on the financial burden to customers, whether businesses or individuals.

Nearly 30 percent of debt at Korean banks is now made up of nondeposit liabilities that may be subject to a bank levy. Since such liabilities are the main fodder for banks’ loan operations, higher costs may translate into higher loan rates, said Seo Byeong-ho, a researcher at the Korea Institute of Finance.

“The whole purpose of the tax will be marred if the financial companies transfer the new tax burden onto their customers,” he said in a recent report.

Canada, one of the most vocal critics of the idea, has suggested an alternative called “embedded contingent capital,” a system that would basically turn the debt of a cash-strapped bank into equity, thus repaying debt holders when the share price rebounds.

Canadian Finance Minister Jim Flaherty said in May that his country’s proposal was being “increasingly welcomed,” especially since other G-20 members including Brazil and Mexico are also opposed to a bank levy.

Seoul has long remained conspicuously reticent on the issue, occupying itself instead with preparations for the big November summit.

But Korea’s Finance Minister Yoon Jeung-hyun, after weeks of being assaulted with unending questions about Seoul’s stance on the issue, hinted on Tuesday that the government might favor the imposition of a bank tax.

“We’re thoroughly preparing to take a leading position in the debates,” Yoon told reporters on Tuesday, “though we have not reached a firm conclusion yet.”

However, the minister added, “I won’t deny that we also feel a considerable need” for such a tax.

By Jung Ha-won []
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