Shortsighted to oppose bank tax, IMF warns

Countries that weathered the global economic crisis with their financial systems relatively unscathed are being shortsighted by opposing a global bank levy, the IMF's chief said on Saturday.

International Monetary Fund Managing Director Dominique Strauss-Kahn suggested a bank tax would be helpful in preparing for crises that could strike anywhere and indirectly criticized countries that might think they would never feel the brunt of a downturn.

The countries ... which are likely to implement (a bank tax) are the ones having had problems in the banking sector, Strauss-Kahn said. The others say, 'We didn't have a problem so we're immune.'

Maybe it's a bit shortsighted, he added, without naming any countries. Canada has taken a lead role in rallying opposition to a tax on banks, and anti-poverty organization Oxfam zeroed in on it for that stance.

It would be shameful if Canada blocks a tax that could provide hundreds of billions of dollars for countries that have been devastated by the economic meltdown, Oxfam said in a statement distributed at IMF headquarters, where its semi-annual meetings were held.

If the IMF can be on the side of the angels, why can't Canada? Oxfam asked.

The possibility of setting some kind of levy on banks split Group of 20 finance ministers at a meeting on Friday and carried on into the subsequent IMF gathering, where Strauss-Kahn faced questions about it from reporters.

He said that before the crisis it was likely that the United States, Britain and some European countries thought they could manage their way through safely, which proved to be incorrect because they were forced to fund massive bank bailouts.

So I'm not sure that this kind of instrument -- it's true also for strong regulation -- shouldn't be applied everywhere, Strauss-Kahn said in best diplomatic fashion.

Canadian Finance Minister Jim Flaherty said on Friday that not only was he steadfastly opposed to a tax but also that he had persuaded some colleagues from other Group of 20 rich and emerging countries to join him.

There are other voices, notably in the banking industry, that want to stop the idea of a bank tax in its tracks.

The Institute of International Finance, which represents 390 firms worldwide, wrote to G20 finance ministers after Friday's meeting to lay out their case against a tax.

The IIF sees no merit in the idea that any levy on the financial sector should be paid into general revenue. Neither do we believe that an ex-ante levy on the banking system should be used to finance the bailing out or recapitalization of failing institutions, IIF Managing Director Charles Dallara said in the letter made public on Saturday.

Dallara suggested such a tax designed to fund future bailouts would only encourage excessive risk-taking, since it meant there would be cash on hand to rescue them in any case.

That would contribute to the persistence of moral hazard and weaken market discipline, he said.

Dallara said the IIF will propose measures for managing failures by winding up firms and suggested that would be a more useful approach than considering new taxes.

We can no longer contemplate a world in which public or private sector funds are used to bail out or recapitalize failing firms.

The IIF is to offer a paper on a proposed resolution arrangement to the Financial Stability Board, which is made up of G20 central bankers and regulators and coordinates financial reforms.

(Reporting by Louise Egan, Francesca Landini and Glenn Somerville; Editing by Padraic Cassidy)