World Business

EU proposes to levy banks for resolution funds

(Xinhua)
Updated: 2010-05-27 14:57

BRUSSELS: The European Commission proposed on Wednesday to establish a European Union (EU) network of national bank resolution funds with a new levy to ensure banks would pay for their own failure.

"We need to build a system which ensures that the financial sector will pay the cost of banking crises in the future," EU Internal Market and Services Commissioner Michel Barnier said.

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Under the commission's proposal, such funds would be set up on national basis in a coordinated way, instead of a EU-wide single fund opposed by several member states including Britain.

Member states would be required to impose a levy on banks to pay for the resolution funds, which would be designed to provide bridging loans to financial institutions deemed to be still viable or help banks get rid of bad assets.

"The commission believes that a way to achieve this is by introducing requirement for member states to establish funds according to common rules into which banks are required to pay a levy," the EU's executive arm said.

Barnier stressed that the funds would not be used for bailing out or rescuing banks, but only to ensure that a bank's failure is managed in an orderly way and does not destabilize the financial system.

As a result of the financial crisis, national governments have had to use massive amounts of taxpayers' money to support their financial sector, which raised important "moral hazard" issues.

"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," Barnier said.

The commission said such funds would form part of a broader framework aimed at preventing a future financial crisis and strengthening the financial system.

The new framework would include a harmonized set of powers and rules allowing regulators to prevent bank failures and to take measures to facilitate the orderly resolution of insolvent banks while minimizing costs to taxpayers.