EU proposes to levy banks for resolution funds

09:46, May 27, 2010      

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The European Commission proposed on Wednesday to establish a European Union (EU) network of national bank resolution funds with a new levy to ensure banks would pay for their own failure.

"We need to build a system which ensures that the financial sector will pay the cost of banking crises in the future," EU Internal Market and Services Commissioner Michel Barnier said.

Under the commission's proposal, such funds would be set up on a national basis in a coordinated way, instead of an EU-wide single fund, which has been opposed by several member states including Britain.

Member states would be required to impose a levy on banks to pay for the resolution funds, which would be designed to provide bridging loans to financial institutions deemed to be still viable or help banks get rid of bad assets.

"The commission believes that a way to achieve this is by introducing a requirement for member states to establish funds according to common rules into which banks are required to pay a levy," the EU's executive arm said.

Barnier stressed the funds would not be used for bailing out or rescuing banks, but only to ensure that a bank's failure was managed in an orderly way and did not destabilize the financial system.

As a result of the financial crisis, national governments have had to use massive amounts of taxpayers' money to support their financial sectors, raising important "moral hazard" issues.

"It is not acceptable that taxpayers should continue to bear the heavy cost of rescuing the banking sector. They should not be in the front line. I believe in the 'polluter pays' principle," Barnier said.

The commission said such funds would form part of a broader framework aimed at preventing a future financial crisis and strengthening the financial system.

The new framework would include a harmonized set of powers and rules allowing regulators to prevent bank failures and to take measures to facilitate the orderly resolution of insolvent banks while minimizing costs to taxpayers.

Barnier said the EU aimed to intervene in future crises before it was too late and the resolution fund should be a prevention fund, not a rescue fund.

But the commission's proposal failed to specify the potential size and operation of the funds.

"It is not the commission's intention at this stage to provide precise details about how bank resolution funds would be expected to operate and how large they would need to be," it said.

EU finance ministers are due to discuss the commission's proposal at their meeting early next month before EU leaders give their opinion one week later.

With a joint EU position at hand, the commission will present the proposal at the G20 Summit in Toronto, Canada at the end of June. It will press for broad agreement on general principles and orientations.

"The commission, with a view to maintaining a worldwide level playing field, intends to lead G20 efforts to find a global approach on resolution funds," it said.

In October, the commission will also put forward more detailed proposals on its broader plans for the development of a new crisis management framework and the planned adoption of legislative proposals.

Source: Xinhua


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