BRUSSELS (MNI) – Banks in the European Union countries should set
up preventive funds to enhance the resilience of the banking sector and
prevent taxpayers’ having to foot the bill for future problems, the
European Commission said on Wednesday.

“The European Commission is today proposing that the European Union
establish an EU network of bank resolution funds to ensure that future
bank failures are not at the cost of the taxpayer [and do not]
destabilise the financial system,” the EU’s executive arm said in a
statement.

The Commission’s plan foresees a levy on the EU’s banks, which
would be stored in a network of “resolution funds” to be used if
financial institutions ran into difficulty.

After many banks across the European Union were bailed out using
taxpayer money during the financial crisis, this plan aims to limit the
impact of such bank failures on taxpayers, using what the EU describes
as a “polluter pays” system.

“The Commission believes that establishing an EU-wide network of
pre-funded schemes with narrowly defined mandates would constitute the
best use of bank levies,” the Commission said in a statement.

The Commission said the funds would be used in a number of ways,
including financing for ‘bridge bank’ operations; for the total or
partial transfer of assets and liabilities; and for a “good bank”‘-“bad
bank” split.

But it said it was important to avoid moral hazard and being seen
to be bailing out the banking sector.

“Shareholders and uninsured creditors must be the first to face the
consequences of a bank failure, and resolution funds will be no
insurance policy, and must be used not to bail out failing banks but
rather to facilitate an orderly failure,” the Commission said.

Some countries, including the UK, object to the plans because they
want more control over the cash that’s paid into the fund, rather than
the EU-controlled funds set out by the Commission.

“At the moment we cannot support the idea of an EU-wide tax or levy
to pay into a pan-European fund. It leaves many too many important
questions unanswered,” said Angela Knight, chief executive of the
British Bankers’ Association.

“Why should the banks in one country pay for the problems of banks
in another?” she asked.

The Commission’s plans will be discussed at the European Council in
June and then presented at the G-20 Summit in Toronto, Canada on 26-27
June 2010.

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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