Merkel plays down prospects for G20 bank levy deal

A Royal Canadian Mounted Police officer holds Canada's national flag as German Chancellor Angela Merkel arrives at Pearson International Airport ahead of the G8 and G20 Summits in Toronto June 24, 2010. Merkel arrived on a German government Airbus A310 aircraft.

TORONTO/LONDON (Reuters) - Germany vowed to press ahead with Europe's plan for global bank tax to pay for bank failures, despite dimming prospects it would win support at the Group of 20 summit this weekend.

G20 host Canada has lobbied hard against burdening banks with a new fee when they already are facing new limits on their activities and tougher capital requirements. One regulator warned a levy would divert cash need to build capital, a view shared by countries that averted a banking crisis.

Germany's Chancellor Angela Merkel told a news conference on Friday she would proceed even though prospects for a bank levy and a financial transactions tax were not as good as she would like.

"We will promote this issue at the summit once again. Not only industrial countries are very sceptical about that, but also some emerging market countries," Merkel said in Canada.

Canada, Japan, Brazil and Australia argue their banks did not need any public help during the financial crisis.

Without a global deal, EU states will find it harder to impose any hefty new taxes on banks otherwise they may shift operations elsewhere.

The Financial Stability Board, tasked by the G20 to coordinate regulatory reforms, is set to tell the summit that a levy can cut risk but should not be an alternative to tougher bank capital and liquidity requirements now being thrashed out.

"Importantly, levies take resources out of banks and therefore do not increase banks' ability to absorb losses," a G20 regulatory source said.

"Wherever they are put into effect, levies should be constructed and implemented in a way that reduces incentives to risk taking, as the proposed UK and U.S. levies do," the source added.

The FSB wants new bank capital and liquidity rules finalised first in November before any levies are introduced.

The FSB will give an update on G20 regulatory reforms in Toronto on Sunday and publish a report on how to tackle "too big to fail" banks so they no longer assume a public bailout if in trouble.