Brussels, 26/05/2010 (Agence Europe) - Rather than setting up a pan-European fund to deal with bank collapse, the European Commission prefers the idea of a network of bank resolution funds, financed ahead of any crisis by the banking industry, ring-fenced and separate from countries' coffers. Details of the size of the funds, how the bank levy to set them up is to be collected and how the funds are to be used has not yet been decided upon. The European Commission will unveil a detailed roadmap in October 2010 on the management of financial crises and this will be followed by draft legislation early next year. In July 2010, the European Commission will unveil changes to member states' savings guarantee systems (deposit guarantee systems).
Unveiling the new plans on Wednesday 26 May, EU Internal Market Commissioner Michel Barnier said that he thought prevention was always cheaper than cure and that “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.” His ideas are close to the initial guidelines sketched out at the April 2010 ECOFIN Council (see EUROPE 10121). Barnier added: “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 hoped the June 2010 European Council would endorse his ideas so that the EU can submit them to its international partners at the G20 summit in Toronto, Canada, on 26-27 June 2010.
Bank resolution funds would not be used when banks fail or are wound up. They could be used to pay for setting up a “bridge bank” to allow a struggling bank to continue operating; transfer some or all the failing bank's assets to a third party; separate off a “bad bank” of the struggling bank's toxic assets; cover legal and consultancy fees and cover the cost of continuing to provide crucial bank services, like payments.
As far as the European Commission is concerned, only banks should pay into the resolution funds. Barnier said he would be keeping a close eye out to ensure bank levies were proportionate and did not unduly penalise banks that stood up well under crisis. Explaining that they work almost exclusively to provide funding for the real economy, cooperative banks oppose the creation of resolution funds (see EUROPE 10115). The commissioner refused to give any figures but the idea is not to exceed the huge bailouts of the banking industry last year (accounting for nearly 13% of average European GDP). The Commission wants the funds to be ring-fenced from national coffers. This is opposed by France and the United Kingdom, which want to use the levy to stem their budget deficits, fearing that otherwise the bank resolution funds would have the unintended consequence of encouraging greater moral hazard because they would be seen as a kind of insurance fund to rescue banks. The devil will therefore be in the detail of how the funds would be set up and how they would operate but the Commission is refusing to comment at this stage.
Bank levy. How would the levy work? Three ideas are examined for deciding how the levy should be determined, namely assets, liabilities and profits. Assets are a good indicator of risks, in the Commission's view, arguing that a levy on assets would, however, be an additional bank capital requirement to be considered with caution. Issuing a levy on liabilities, as recommended by the IMF and as implemented in Sweden (see EUROPE 10059), would make it possible to calculate exactly how much cash would be required to restructure a bank but would not be such a good indicator of risk. A tax on profits would correspond to the “polluter-pays” idea but would not necessarily correlate with the sums required.
The Commission says that draft legislation on a network of member states' bank resolution funds should echo the approach taken in the talks on the draft legislation to reform the EU's financial supervision package (see EUROPE 10138), believing it would be very difficult to set up a European resolution fund without a European legal framework to this end and married to crisis management and supervision. The European Parliament takes a different view, disagreeing with the Council of Ministers because MEPs want a Europe-wide fund to be set up to supervise financial institutions operating in more than one country. (M.B./transl fl)