Business World

Sunday 24 September 2017

EU proposes cross-border bank bailout powers

John O'Donnell and Huw Jones

EUROPEAN Union countries could be obliged to bail out one another's struggling banks, according to a draft EU law that marks a big step towards greater EU financial integration likely to upset some members, particularly Germany.

Spain's banking troubles and the risk that a bank run in a country such as Greece could spread have given new impetus to delayed EU proposals for a law to deal with failing banks.

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.

The leaked report seems similar to proposals made by Central Bank governor Patrick Honohan in a recent speech.

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 156-page draft -- aimed at stopping banks from being "too big to fail" or their collapse wreaking widespread market havoc -- also maps out new powers for supervisors to "bail in" or impose losses on bondholders to shore up a lender's capital so taxpayers are kept off the hook.

Levy

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 1pc 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.

The draft has been finalised shortly after European leaders, meeting in Brussels last week, agreed to examine ways to deepen integration in the European Union and eurozone, which could include closer co-operation on banking. The draft does not suggest the immediate introduction of a single European Union fund to wind up or rehabilitate troubled banks, an approach favoured by the European Central Bank.

But the plan does break new ground on earlier drafts by proposing closer ties between national funds, a move towards the creation of a common EU scheme. (Reuters)

Irish Independent

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