May 26 2010Brussels unveils framework for bank levy
European taxpayers should not have to bear the costs of rescuing ailing banks, a top European Union official said on Wednesday as Brussels formally unveiled its proposal for EU countries to form national funds to insure against future bank failures.
The plan, which would be financed by levies on the banking industry, would aim to ensure that future bank failures do not destabilise the financial system.
“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,” said Michel Barnier, EU internal market commissioner in Brussels.
Mr. Barnier was speaking as US Treasury secretary Timothy Geithner arrived in Britain at the start of a trip to Europe in which he will press for united action to tackle the eurozone’s deepening debt crisis. He is also expected, according to some reports, to urge EU officials to conduct bank stress tests similar to those carried out by the US last year,
The proposals from the EU’s executive body are at an early stage and there will be much debate among EU governments over whether any bank levies should be dedicated to a specific purpose or available for use by national treasuries generally.
But the commission plan will be discussed by EU finance ministers and leaders next month, and Brussels is hoping for sufficient endorsement to allow representatives to push the “bank resolution” fund idea at the G20 meeting in Toronto at the end of June. June 26-27-2010 -The G20 Meets in Toronto, Canada
Mr Barnier said on Tuesday that the European Commission believed that banks should be asked to contribute to funds designed to “manage bank failure, protect financial stability and limit contagion”.
But he stressed that these funds – which Brussels wants all EU countries to establish individually, but with common rules – should not be bail-out funds. Rather, they should be designed to ensure that future failures and insolvencies are managed in an orderly way and do not destabilise the financial system generally.
They could be used, for example, to provide bridge financing, guarantees, or the temporary purchase of “bad assets” where an institution is being split into a “good” and a “bad bank” – a solution used repeatedly during the recent financial crisis.
A commission paper published on Wednesday also emphasises that actions by such funds will have to be fully compliant with EU state aid rules.
The scale of these funds is likely to be a subject of much discussion, and Brussels is not setting out firm recommendations at this stage. However, it does note that some countries are already moving to impose levies on banks, in order to establish dedicated funds.
In Germany, for example, it is estimated that these could raise about €1bn annually, although details are still being developed. In Sweden, a “bank stability” fund is due to amount to about 2.5 per cent of gross domestic product within 15 years.
The International Monetary Fund, meanwhile, has suggested that – on the basis of past experiences of financial crises – resolution funds that amount to about 2-4 per cent of GDP should be adequate.
Another issue left open by Brussels at this stage is whether levies should be based on bank assets, liabilities or profits.
But the commission does emphasise that funding must be “ex ante” – that is, upfront – and that banks should not be allowed to pass the costs on to their customers. It also stresses that funds should be kept ring-fenced from national budgets – a particularly contentious subject.
Officials in Brussels plan to produce more detailed proposals in the autumn, before coming forward with legislation early in 2011.
This EU-wide network of “bank resolution” funds is seen by EU officials as a key plank in establishing a much stronger “crisis management” system at European level. Two months ago, Mr Barnier made clear that he felt that “non-binding” co-operation between supervisors – the current set-up – was insufficient.
But the banking industry, although resigned to some sort of new tax to cover future bank failures, is likely to fight intensely over the details of any proposal. Views within the industry are divided, with the European Banking Federation describing this as a “very difficult issue”.
