29 May 2012

Reuters: EU proposes cross-border bank rescues

The European Commission, the EU's executive, will propose the rules on June 6, to grant local regulators what one official described as "aggressive intervention powers" to take control of stricken banks, break them up and impose losses on their bondholders. If accepted by EU member countries, it would be a first step towards a pan-EU system of supervising and paying for the winding up of banks in difficulty, a vital element of the "banking union" the European Central Bank has called for.

The law, which could come into effect as early as 2014, would introduce what some officials describe as an insolvency regime for banks in the EU. It would also instruct countries to prepare for the collapse of a bank, by collecting the equivalent of 1 per cent of bank deposits from an annual levy on banks. That money would be held in reserve and used in an emergency to prop up a troubled bank with loans or guarantees.

Strict rules to pool national funds would likely encounter stiff opposition from countries such as Britain, which has argued that London - not Brussels - should have sole authority in deciding when to provide money to support banks. The push towards a single resolution fund will also make Germany uncomfortable. It has opposed any attempt to use its financial muscle to prop up lenders in weak countries such as Spain.

Speaking in Paris recently, Michel Barnier, the European Commissioner in charge of regulation, said the proposals included several steps. "When supervisors identify a risk, there would be an early warning that could trigger a number of decisions including a ban on some banking activities, a ban on dividends being paid out and a change of management", he said. "If the crisis becomes very serious and there is a need for an orderly bankruptcy, there would be a mechanism that could manage that. The bank would be able to manage it, with a resolution fund, creditors and shareholders."

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