Bank failures
March 19, 2010
Michel Barnier, the EU's man in charge of new European financial regulation, told a conference of financial watchdogs in Brussels on Friday that banks should pay for a future crisis in the sector by contributing to an emergency wind-up fund.
"The first essential step is for the EU to harmonize its rules over tackling troubled banks. And financial institutions should contribute to a central fund. This is also a moral question," Barnier said at the conference.
"Why should European citizens pay for the considerable risks taken by financial institutions?", he added.
Speaking at the same event, the managing director of the International Monetary Fund (IMF), Dominique Strauss-Kahn, came out in support of the idea.
"What I think is needed is a European resolution authority, armed with the mandate and the tools to deal cost-effectively with failing cross-border banks," Strauss-Kahn said.
Stiff opposition
Since Lehman Brothers collapsed in 2008 and triggered a series of European bank failures or bailouts, EU member states have been looking for ways to prevent huge bailouts of banks at the expense of taxpayers.
But the question who should pay instead has sparked a heated debate.
Britain, which has the bloc's biggest financial sector, is vigorously opposed to Barnier's plans. London does not want to rely on a central European fund to which EU states would have to contribute.
There is a fear that banks will become complacent if they know the EU has a system in place that would bail them out. Britain believes such a fund will not be enough to deal with a potential bank collapse.
The deputy head of the UK's central bank, the Bank of England, Paul Tucker, who also attended the conference, suggested a system that would restore market discipline to the financial sector by forcing uninsured creditors – such as bondholders and derivatives counterparties – to bear some of the loss if a bank becomes insolvent.
Details unclear
Barnier's idea of a wind-up fund is in the early stages; how it would work in practice is still unclear. The European Commission is increasingly concerned that there is still no way for European governments to track the activities of cross-border banks, making any sort of early-warning system hard to set up.
Barnier plans to present a paper on how to deal with future threats to cross-border banks to European finance ministers later this year.
Author: Nina-Maria Potts (ng/Reuters)
Editor: Susan Houlton