The European Commission, an arm of the European Union, is proposing to require that countries in Europe establish funds to finance future bank failure procedures.

The commission said Wednesday that it will present its ideas at the upcoming G20 summit in Toronto, and that it hopes to lead to global adoption of its proposed model. It is proposing a requirement for countries to establish funds, according to common rules, financed by a levy on banks, which would not be used for bailing out banks, but to ensure that a bank’s failure is orderly and does not destabilize the financial system.

The commission says that a number of European countries have already introduced, or are considering introducing, levies on their banking sector. However, it says that the lack of a coordinated approach towards how much money should be levied, and how it should be used, means there is a risk of competitive distortions between national banking markets and of cross-border cooperation during crises being hampered.

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. These funds would be designed to provide financing for: ‘bridge bank’ operations; total or partial transfer of assets and/or liabilities; and financing a ‘good bank’ / ‘bad bank’ split.

The establishment of resolution funds would enhance the resilience of the banking sector and avoid the need to resort to taxpayer funds, it adds. To avoid moral hazard, it says that it must be clear that shareholders and uninsured creditors must be the first to face the consequences of a bank failure and that resolution funds will be not to bail out failing banks, but rather to facilitate an orderly failure.
For now, it is not offering precise details about how bank resolution funds would be expected to operate and how large they would need to be. The commission intends to present its ideas to EU finance ministers, heads of state and the G20 over the course of June, where it will press for broad agreement on general principles. In October, it plans to 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.

“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. We need to build a system which ensures that the financial sector will pay the cost of banking crises in the future. 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. Europe must take a lead in developing common approaches and providing a model for cooperation which could be applied globally,” said Internal Market and Services commissioner, Michel Barnier.

IE