By Cho Jin-seo
The G-20 nations have abandoned the idea of adopting a global, universal bank levy system on financial firms and will allow each nation to set its own standard, if any, a senior Korean presidential aide said, Thursday.
"The principle is that if a country doesn't want it, then it will not have it," said Shin Hyun-song, the top economic adviser to President Lee Myung-bak, during an interview with The Korea Times, ahead of today's G-20 financial ministers' meeting.
"Once the big framework is settled, leaving a few countries out of the scheme will not matter much," he said, citing Canada and Australia as candidates for such an exemption.
Shin, who teaches economics at Princeton University and has published influential papers on this issue, has served as the brain of Korea's G-20 initiative during a sabbatical this year.
With Korea chairing the G-20 finance meeting this year, Shin is being credited for coordinating and moderating the international agenda from behind the scenes.
The bank levy is one of the key issues of cleaning up the mess of the recent financial crisis. The idea is to levy a tax on banks during boom times, and using the money to bail out failing banks during bad times.
The G-20 nations have struggled to reach an accord on this issue because of their differing national interest. The United States and some European countries, which have used massive state funds to bail out financial firms during the crisis, agree on the need to adopt a global bank levy. But Canada and Australia have been staunchly objecting to the proposition, as they worry that it may unnecessarily undermine their relatively healthy banking industry.
Most emerging nations within the G-20 have remained silent on this issue, since they figure out that they have nothing to lose.
Shin said that the final decision will not be made until November's summit in Seoul. U.S. Treasury Secretary Timothy Geithner said that he doesn't believe the G-20 will be able to reach a consensus for a universal bank levy in Busan.
Giving up this idea means that the G-20 is no longer putting priority on the idea of making a "level playing field" for banks in different countries. But the countries still need further coordination in setting up details, such as the tax jurisdiction issue of global banks' local branches, and financial firms operating from tax havens.
Shin, whose research topic in academia includes "macro-prudential economic policy," stressed that the bank levy is only one of many reform tools for the global economy, and its effects on the financial sector would have been limited.
"The bank levy is the least burdensome regulation of all," he said, adding it was just like the traffic congestion charge in London and in Seoul. "It is a prudent policy. The main idea is to levy the banks only when their operation becomes bubbly. So in ordinary circumstances, the amount of the levy would be very small."
In a recent paper he co-authored with Korea University professor Shin Kwan-ho, Shin suggested to levy on non-core liabilities of banks, which are not backed by deposits. But the details on how to raise and how to use the fund has yet to be decided in Korea, he said.
In South Korea and other open and small economies, policy makers have been trying to use global collaboration at the G-20 to strengthen state control on cross-border capital flow to prevent the spill-over of a crisis. Along with the adoption of a bank levy, South Korea will tighten regulations on foreign exchange futures trading, and will push for reform at the International Monetary Fund, Shin said.
He also said Canada's "contingent capital" scheme is not an efficient alternative to bank tax, and its spread cannot be used as the bellwether for a crisis.
South Korea is chairing this week's G-20 ministerial meeting in Busan, as well as the presidential summit in Seoul in November. Shin said that top government officials, such as Finance Minister Yoon Jeung-hyun and chief regulator Chin Dong-soo, are working in tandem to ensure a successful result.
"It is a harmonious collaboration," he said.