Commission calls for funds to deal with bank failures

Michel Barnier wants network to support banks that get into trouble.

The European Commission today (26 May) called for the creation of a harmonised network of national “resolution funds” to support banks that get into financial difficulties.

Michel Barnier, the European commissioner for the internal market, says the funds are essential to prevent taxpayers having to pay for bail-outs for ailing banks in a future crisis.

The funds would be financed by national levies on the banking sector. “Taxpayers should no longer be on the front line,” Barnier said.

The funds would pay for early interventions to support banks that get into financial difficulties, preventing matters from escalating to the point where a full-scale bail-out is needed. They would cover interventions such as the setting up of a bridge bank or bad bank, and the transfer of assets or liabilities. They would also cover legal fees.

Barnier wants member states to pool money from their funds to cope with difficulties in large, cross-border banks. 

The Commission warned, in a policy paper it adopted today, that “failure to adopt an EU approach” to the funds could lead to “competitive distortions between national banking markets” and practical “obstacles to efficient handling of crises”. It wants every member state to have a fund, designed according to common EU criteria.

“If private-sector funds are available in some member states but not in others…[it] may render agreement on the sharing of costs more complex, if not impossible,” the paper said.

Several countries, including the UK and France, want to use money from bank levies in their general budgets, rather than resolution funds. They argue that the levies would help them to reduce their budget deficits, a pressing necessity in the context of the eurozone debt crisis.

George Osborne, the UK’s finance minister, said today that the purpose of the UK’s planned bank levy would be “to raise money for general expenditure purposes”.

The UK and other governments also fear that the creation of funds would lead to moral hazard, as banks would know that they would be supported if they got into difficulty as a result of irresponsible activities.
 
Barnier, however, is firmly against paying the money into national budgets. He said that funds “allow for proper restructuring and resolution before any major disaster hits a financial institution”.

“You don’t have to wait for a disaster to occur and then ask the taxpayer to step in,” he said.

The Commission plans to consult with member states and the financial sector before deciding in the autumn which harmonised criteria should apply to the funds, including how the bank levies should be calculated (eg, based on liabilities or profits), and how large they should be. Draft legislation will follow in early 2011.

The Commission’s policy paper says that the creation of the national funds should serve as a stepping stone to having a single financial reserve, managed at EU level.

It says that the network of national funds would be “first step” that “would be reviewed by 2014 with the aim of creating integrated crisis management and supervisory arrangements, as well as an EU resolution fund in the longer term”.

Barnier denied, however, that he had already decided to push for a single European fund. 

“The Commission’s proposal doesn’t involve one single fund or a federal fund,” he said, adding that the idea was not practical in the current political climate.

“Our proposal is realistic and pragmatic in today’s circumstances,” he said.

Under attack

The Commission’s plans have been fiercely attacked by the business community as a threat to vital bank lending and damaging to the EU’s competitiveness.

“If they [the levies] were applied to Europe and not to the rest of the world they would damage the competitiveness of our financial services industry,” Richard Lambert, the director-general of the Confederation of British Industry, said.

“The Commission needs to be very wary of unintended consequences, and many questions remain unanswered,” he added.

“An ex-ante fund would entail large costs for the banks,” Robert Priester, head of department for wholesale and regulatory policy at the European Banking Federation (EBF), said.

Priester said that the EBF’s members “are concerned about the multiple financial requirements on banks”.

“The cumulative impact of all the current and forthcoming proposals…aimed at the banks…needs to be assessed to guard against adverse unintended consequences,” he said.

“At the moment we cannot support the idea of an EU-wide tax or levy to pay into a pan-European fund,” Angela Knight, chief executive of the British Bankers’ Association, said. “Why should the banks in one country pay for the problems of banks in another?”

Sweden is currently the only member state to have set up a resolution fund, although Germany has said that it will follow suit.

The Commission estimates that the EU spent 13% of its gross domestic product to support the banking sector during the financial crisis.