Eu Proposes New Levy On Banks To Form Crisis Funds
The EU internal market commissioner has urged that a network of national funds should
be introduced to ensure taxpayers aren't left to foot the bill in the event of bank failures.
Michel Barnier, Vice President of the European People's Party, said the funds would make up a broader system which could help to prevent future financial crises.
As part of the proposed system banks would be required to pay a levy into the funds which would be used to manage failures in "an orderly way", rather than simply being used to bail out banks that fall into difficulty.
Mr Barnier said: "I believe in the 'polluter pays' principle."
"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," he said.
The EU report also pointed out that any levies incurred by banks should not be passed on to their customers in the form of high interest rates or charges.
Mr Barnier said it should be up to the financial sector to handle the financial problems caused by future banking crises.
"That is why I believe that banks should be asked to contribute to a fund designed to manage bank failure, protect financial stability and limit contagion - but which is not a bail-out fund," he said.
"Europe must take a lead in developing common approaches and providing a model for co-operation which could be applied globally," he added.
Instead of looking to enforce a pan-European fund, the EU is backing a "harmonised set of powers and rules" allowing regulators in each country to take necessary measures to deal with insolvent banks.
The proceeds of funds would be kept within national borders, but there are some national disagreements as to whether the money should go into a special ringfenced fund or wider national coffers.
However, the EU has acknowledged that setting up funds could cause "moral hazard" concerns, as banks may feel more comfotable taking greater risks with the knowledge that they are partly insulated from the consequences of their actions.
Angela Knight of the British Bankers Association said that having large resolution funds could help to assist in a future crisis.
"It would surely increase moral hazard by curtailing the consequences of a bank failure," she said.
Alternatively, she suggests that each country should reinforce its regulation and supervision, with a national intervention authority, being the Bank of England in the UK.
"And each country needs to put in place arrangements so that if intervention is required, then this is paid for by the industry and depositors are protected," she added.
However, the EU proposition says that it would be made "clear and unambiguous" to shareholders and uninsured creditors that resolution funds wouldn't be used as an insurance policy against bank failure.
The commission's proposals are to be presented to EU finance ministers, heads of state, and the G20 next month 2010.
by: Sam Gooch
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