Europe seeks new levy on banks to create crisis funds

Taxpayer-funded bank bail-outs sparked protests around the world

A network of national funds should be introduced so the cost of bank failures are not met by the taxpayer, the EU internal market commissioner has said.

Michel Barnier said such funds would provide part of a broader system aimed at preventing future financial crises.

Banks would be required to pay a levy into the funds which would not be used to bail out failing banks, but manage failures in "an orderly way".

Mr Barnier said: "I believe in the 'polluter pays' principle."

"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," he said.

And the EU report said that any levies that banks were made to pay should not be passed on to their customers in the form of higher charges.

'Common approaches'

Michel Barnier: 'No one is protected from a potential crisis'

Mr Barnier said the financial sector should pay the cost of banking crises in 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."

He added: "Europe must take a lead in developing common approaches and providing a model for co-operation which could be applied globally."

Rather than seeking to impose a pan-European fund the EU is backing a "harmonised set of powers and rules" which would allow regulators in each country to take measures to deal with insolvent banks.

'Moral hazard'

The proceeds of funds would remain within national borders, but there are some national disagreements about whether the money should go into a special ringfenced fund or wider national coffers.

However, the EU recognises that setting up funds could lead to "moral hazard" concerns, with banks potentially taking excess risks as theyfeel they are partially insulated from the consquences of their actions.

Continue reading the main story Eurozone crisis in numbers

And Angela Knight of the British Bankers Association said that having large resolution funds, as the EU proposes, could help facilitate the next crisis.

"It would surely increase moral hazard by curtailing the consequences of a bank failure," she said.

Instead, she proposes that each country should strengthen its regulation and supervision, with a national intervention authority, being the Bank of England in the UK.

"And each country needs to put in place arrangements so that if intervention is required, then this is paid for by the industry and depositors are protected," she added.

However, the EU proposal states that it would be made "clear and unambiguous" to shareholders and uninsured creditors that resolution funds would not be used as an insurance policy against bank failure.

The commission said that at this stage it was not its intention to provide precise details about how bank resolution funds would be expected to operate, or how large they would need to be.

Its proposals will be presented to EU finance ministers, heads of state, and the G20 in June 2010.

A draft EU law would be proposed in early 2011, which would need European Parliament approval.

Independent commission

The move is among the global attempts to tighten up banking regulation.

UK Chancellor George Osborne has favoured a banking levy but would prefer national governments to have more freedom to decide how the money is spent.

In the UK, an independent commission is being established to look at breaking up banks into their retail and investment banking arms to reduce risk.

Meanwhile, EU ministers recently voted to curb the activities of hedge funds and certain other investment funds.

Failed firms

A Senate bill in the US containing the biggest overhaul of banking regulation since the 1930s is awaiting approval by the House of Representatives.

Both the Senate and House have put forward bills that would give the government more power, if a bank does fail, to break it up.

The House bill would create a $150bn fund, financed by big financial firms, which would be used to dissolve failed firms, sparing the tax payer the cost of saving failed firms.

However, there have been fears that regulators may be tempted to use the fund to save failing firms.

So the Senate bill also includes measures under which a firm could be dissolved, and the bill for the work paid for by a levy on large financial companies.

The Senate and House bills have to be merged before being sent to President Barack Obama for signing into law.