TORONTO -(Dow Jones)- Leaders of the Group of 20 developed and developing nations have scrambled together a basic accord on plans to toughen financial regulations, but it was clear by the end of this weekend's summit in Toronto that they also sowed a fair degree of discord.
In general, countries whose banks survived the recent financial crisis are taking the view that they have already proven the worth of their regulatory frameworks and so aren't willing to pay the price for others' errors. That left the world divided between crisis-battered U.S. and Europe on one side and the rest of the world, comprising developing nations but also Canada and Australia, on the other.
Nowhere is this division clearer than in the debate over a Europe-backed plan to introduce a bank tax, a program that's aimed both at building up an insurance fund against future episodes of systemic risk and recouping the costs of fiscal stimulus measures and bank bailouts incurred after the 2008 crisis.
While the final communique repeated G-20 members' previous commitments to introduce tighter bank capital requirements by 2012, it showed no agreement on the bank-tax plan. The statement merely said countries should be free to examine "a range of policy approaches" while noting that "some countries are pursuing a financial levy."
Essentially, the failure to resolve this high-profile Europe-driven idea reflected concerns from developing nations and others that the tax would impose an unnecessary additional cost. They feared it would put their banks at a competitive disadvantage, or at least would reduce the advantage they would gain if, as expected, European Union countries and the U.S. go ahead with a tax on their own.
"We agree that some countries should impose taxes...but that doesn't mean that every country should do the same," said Guido Mantega, Brazil's financial minister, during a press briefing on the sidelines of the G-20 summit Saturday. "In Brazil we already have greater taxation of our financial system; we have a tax on financial transactions and also higher income tax rates on financial activity."
Meanwhile, Mexican Finance Minister Ernesto Cordero, after boasting of how well his country's banks weathered the crisis, warned against pushing too hard on other elements of a financial regulatory overhaul, including stricter capital and prudential requirements. He emphasized the role that credit creation plays as "the engine of economic activity."
Mexico is in an unusual situation as its banking sector is mostly controlled by European and U.S. banks. This has fueled concern that, if the banks' parent companies are required to recapitalize in compliance with stricter new international rules, it could weaken their Mexican subsidiaries.
Such views have frustrated officials in Europe. Delegates from some European countries expressed annoyance that developing nations were being complacent over the potential risks their own banking systems faced. Some felt they were freeloading on the more prudent posture of the Europeans and the Americans and said they feared there was too little in place to prevent a future crisis in emerging-market countries from later infecting the rest of the world.
Some point out, for example, that despite China's low official debt-to-gross- domestic-product ratio, which is formally estimated at about 20%, there are significant risks in its banking sector arising from bad debts owed by certain off-balance-sheet vehicles used by many high-spending provincial governments.
There are also concerns that inconsistency in tax regimes will encourage so- called "regulatory arbitrage," where globally nimble institutions simply move operations into those countries perceived to maintain a softer hand over their activities.
Addressing such concerns, the International Monetary Fund tried to walk a fine line between these issues in a report Sunday on bank taxes.
"Countries' experiences in the recent crisis differ widely, and so do their priorities as they emerge from it," the IMF said. "But none is immune from the risk of future failures and crises. Unilateral actions by governments risk being undermined by tax and regulatory arbitrage. Effective cooperation does not require full uniformity, but agreement on broad principles."
Yet in many respects this was bound to be a divisive issue.
"It's really, really hard" to convince countries such as Canada--ones which " have already paid the price" by restricting their financial sector's expansion during the boom times--that they should add further measures just to satisfy those who had run more lax policies, said Daniel Schwanen, a senior adviser at the Center for International Governance Innovation, a Waterloo, Ont.-based think tank.
-(Geoffrey T. Smith contributed to this article.)