Tags: EU | Europe | Financial | Crisis

EU Seeks Bank Levy to Help Prevent Future Bailouts

Wednesday, 26 May 2010 08:43 AM

Banks should pay a levy to help prevent future bailouts and shield taxpayers from the burden of multibillion dollar rescues, the European Union's top financial chief proposed Wednesday.

European governments are currently battling a debt crisis that has caused the euro to slide sharply against the dollar. The crisis was partly caused by the huge price states paid to rescue their financial systems over the past two years.

EU Financial Services Commissioner Michel Barnier said Wednesday it is "not acceptable" that taxpayers should pay for costs that should be borne by banks.

He suggested that banks should pay a charge toward a fund in their country that would help pay for the costs of unwinding a bank that is teetering on the edge of collapse. Such costs can include financing for bridging loans, transferring assets, creating a "bad bank" to take on problem assets and paying for lawyers, administrators and advisers.

Fees charged by law firms and others working on the messy unwinding of Wall Street investment bank Lehman Brothers have reportedly amounted to hundreds of millions of dollars.

The EU's proposed levy would not pay directly to bail out or rescue banks from bankruptcy. Rather, it would pay for the creation of a "resolution fund" and rules to handle bank insolvency may allow troubled banks to seek help at an earlier stage and avoid the need for state help to keep them afloat.

"We're not talking here about last-minute rescue or bankruptcy, we're talking about well before the disaster," said Barnier, calling for regulators to more closely watch banks and intervene — and even demand management change — if their collapse was likely to pose a risk to the financial system.

The EU's executive commission said it should be "clear and unambiguous" that shareholders and creditors "must be the first to face the consequences of a bank failure" like emergency recapitalizations.

"Taxpayers should no longer be in the front line, in particular they shouldn't be called upon to pay for the mistakes in management made by certain banks," he told reporters.

Governments pledged some 13 percent of their economic output on bailing out banks in 2008 and 2008, according to EU estimates.

Barnier said he would talk to European banks about his ideas before proposing concrete details about how it would all work — such as whether the levy would be based on the banks' assets, their liabilities or their profits and bonuses.

He will also seek the support of EU leaders at a June 17 meeting before he could move forward and draft new rules, including wider crisis prevention plans in October.

The EU said the costs of any new program would be "calibrated in such a way as to avoid stifling economic recovery and increasing the cost of credit to the real economy" or the cost of banking charges for customers.

Barnier said he would also lay out his ideas to the United States and other countries who are part of the Group of 20 rich and emerging economies at a June 26-27 summit in Toronto.

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