Draft EU law may compel states to bail out each other's failing banks

EU COUNTRIES could be obliged to bail out one another’s struggling banks, according to a draft European Union 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 will propose the rules on June 6th, 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 states, 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.

The draft has been finalised shortly after European leaders agreed in Brussels last week to examine ways to deepen EU and euro zone integration, which could include closer co-operation on banking.

The draft does not suggest the immediate introduction of a single EU fund to wind up or rehabilitate troubled banks, an approach favoured by the European Central Bank. However the plan does propose closer ties between national funds, a move towards the creation of a common EU scheme.

That could oblige a scheme in Britain, for example, to lend to a fund in France, if a bank with operations in both countries were to face collapse.

If the law is approved, the commission will in 2014 look at the next step and assess how a “more integrated framework” for winding down banks might be best achieved, the document said.

In the document, commission officials wrote: “An effective resolution regime should avoid that the costs . . . of a failing institution are borne by . . . [the] taxpayer . . . [and] should also ensure that large and systemic institutions can be resolved without jeopardising financial stability.

“Member states shall ensure that financing arrangements under their jurisdiction are obliged to lend to other financing arrangements within the union.”

One EU official familiar with the text said: “It leaves some wiggle room, but there must be an arrangement to co-operate between countries.”

Such proposals, which require the blessing of the EU’s 27 states as well as the European Parliament, would stand little chance of success without the backing of Germany and Britain. – (Reuters)