McGuinness unveils plans to safeguard taxpayers from funding failed banks

Ireland’s European Commissioner Mairead McGuinness unveiled proposals to stop taxpayers from footing the bill when banks collapse after a series of failures in the United States and Switzerland rattled markets earlier this year.

The proposals would tweak rules that were put in place following the economic crisis and would extend tools that are available to manage crises in “too big to fail” banks to cover smaller and medium-sized banks as well.

Banks would have to hold enough resources to weather a crisis under the plans, and deposits above €100,000 would be protected by national deposit guarantee schemes.

“The goal is to improve how we manage bank failures while safeguarding financial stability and protecting taxpayers,” said McGuinness, who is European Commissioner for Financial Stability, Financial Services and the Capital Markets Union.

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“Despite progress over the last decade, there’s still a lot of work to do.”

Failing banks would be able to go into resolution, rather than liquidation, meaning that customers maintain access to their accounts, something that the commission said would shield “the real economy from the impact of bank failure”.

The plans “will enable authorities to organise the orderly market exit for a failing bank of any size and business model”, noted a commission statement.

The proposals will now be considered by EU member states and the European Parliament.

Commission vice-president Valdis Dombrovskis said that the recent bank failures had highlighted why such reforms are important.

“The recent failures of some US and Swiss banks and resulting stress in the international banking sector are just a reminder of why we need a strong functioning system to deal with all banks, whatever the size, when they get into trouble,” he told reporters.

“Also when it comes to smaller and medium-sized banks. This is where we often see national authorities use taxpayers’ money to deal with a looming failure instead of bank’s own resources and industry-funded safety nets. It means that the resolution system ... is not fully functioning as intended.”

‘Footing the bill’

The reforms would lead to a “more efficient and cheaper” system in which fixing bank failures would be funded by the industry rather than by the public, he continued.

“If a bank fails, taxpayers should not end up footing the bill,” said Mr Dombrovskis.

There would be no change in the protection of deposits up to €100,000, which remain insured against bank collapses across the EU.

The commissioners expressed hope that the proposal would go some way towards unlocking progress towards completing the EU banking union and creating a Europe-wide deposit guarantee scheme, plans which have foundered in negotiations since 2015.

But they acknowledged that there are significant divisions among member states on the issue, something that prevented the Eurogroup club of finance ministers, chaired by Minister for Public Expenditure Paschal Donohoe, agreeing on a work programme towards the creation of an EU banking union.

“Eurogroup was not able to agree on the work programme of completion of the banking union, exactly because there are differences of member states’ opinions on various subjects,” said Mr Dombrovskis.

The commission had been asked to put forward this proposal in the absence of a work programme, he added.

“We did our best to take various member state views into account.”