EU agrees to co-operate when banks fail

Commission says EU member states back greater policy co-ordination and creation of bank-financed bail-out funds, but pooling of funds remains “sensitive”.

The European Commission claimed today (17 April) that it had won broad endorsement from member states for increased EU co-ordination in handling bank failures.

The Commission’s proposals include the creation of national ‘resolution funds’, financed by the banking sector, that would be used to pay for insolvencies, and “early interventions” by regulators into failing banks. The Commission is also calling for legal reforms so that shareholders and unsecured creditors, rather than taxpayers, bear the financial costs associated with the failure of a bank, under what is referred to as a ‘polluter pays’ principle.

Michel Barnier, the European commissioner for internal market and services, presented his ideas to EU ministers today at an informal meeting in Madrid. “[Failing] banks must be able to be reorganised, or liquidated in an orderly and foreseeable way,” he told the ministers. “This presupposes a co-ordination at European-level and a common tool box,” he added.

He said these steps were essential to prevent a repeat of the huge taxpayer bail-outs of banks during the financial crisis, which, he said, had created a problem of moral hazard, the possibility that banks might make riskier investments knowing that the costs of failure would be borne by others.

Barnier told ministers he recognised that some of his ideas, notably that money from resolution funds should be pooled to deal with cross-border banking failures, were “sensitive” and would require much further discussion.

Member states are split on the benefits of resolution funds, with some, including France, Austria and the UK, concerned that they could increase moral hazard. Barnier plans to publish a policy paper on resolution funds in June.

Olli Rehn, the European commissioner for economic and monetary affairs, who stood in for Barnier at a press conference after the meeting, said: “There was a recognition [among ministers] that…it is important to develop consistent instruments that are as harmonised as possible”. He said Barnier’s proposals had received “broad support”.

Both Rehn and Spanish Finance Minister Elena Salgado, who chaired the meeting, said that care would be taken to ensure that the cumulative impact of Barnier’s proposals, and other planned reforms to the banking sector, did not overburden banks in ways that made it difficult for them to lend. Banks have complained vehemently in recent months that policymakers are failing to take into account the cumulative impact of financial reforms.

Rehn said that co-ordination of different reforms, notably the introduction of stability fees and an international overhaul of bank capital requirements, would need to be done “very carefully”.

Jean-Claude Trichet, the president of the European Central Bank, reinforced this point, saying that reforms should not “hamper recovery”. “We need to look at the right calibration of any taxes or levies [on the banking sector],” he said.

Ministers agreed their main messages for the next summit of the G20 group of industrialised and emerging economies, taking place in Toronto on 26-27 June, notably the need to maintain momentum on financial reform. G20 finance ministers will hold a preparatory meeting for the summit on 23 April.

The EU is keen to see progress on reform in the US. Barack Obama, the US president, is trying to secure the passage of a major financial reform bill through Congress by the end of May, but is facing staunch opposition from Republicans, who say the bill would do too little to protect taxpayers from having to bail out banks. The bill includes the creation of a €50 billion resolution fund, which Republicans strongly oppose.

Ministers also agreed principles for reform of the International Monetary Fund (IMF), ahead of a meeting of the IMF on 24-25 April. Salgado said that the EU wanted greater ministerial involvement at the IMF, and that changes to the distribution of voting power should be agreed in tandem with other governance reforms.