EU plans bank ‘resolution’ fund

THE first step towards setting up a Europe-wide multi -billion euro fund to rescue or liquidate failing banks was taken by EU finance ministers as part of a major crisis-management package.

But whether the Irish Government could retrospectively recoup some of the billions used to bail out Irish banks from such a fund is unclear.

Internal Market Commissioner Michel Barnier put forward the ideas for the so-called Resolution Fund to the ministers, who were meeting informally in Madrid and discussed them briefly.

He said the fund should be based on the polluter pays principle to ensure the cost of any bank failure is borne as much as possible by the private sector through a financial transaction tax. Each country would set up its own fund, financed by the banks, to deal with any problems with institutions within that state.

Making arrangements to cover cross-border banking groups would take longer and be more difficult, he conceded, but he said there should be robust burden -sharing arrangements between states to cover them.

The aim would be to avoid a repetition of the situation seen in Ireland and other countries where citizens and taxpayers have had to bail out banks. So far this has cost the EU a massive 13% of GDP, he said.

Shareholders, uninsured creditors through ‘haircuts’ and management should pay first, he said. Economically, member states could not support further bank bail- outs without damaging their growth and financial stability, even if they could do so politically.

He pointed out that the current bailout has resulted in the system being “awash with moral hazard” and added: “An efficient crisis- management framework is crucial to address the issue of institutions that are perceived as too big to fail.”

But, Mr Barnier said, bailing out or liquidating failed banks cannot be the only options. There should be a comprehensive set of tools and sufficient harmonisation across the EU that would allow authorities to deal rapidly and effectively with crisis in domestic and cross- border financial institutions.

Such a framework must trigger the right remedies and reactions before a bank gets into real difficulties.

These early intervention powers could include requiring a bank to cease certain activities or limit profit distribution and would require harmonisation of powers to impose ‘haircuts’ on uninsured creditors and transfer assets and liabilities.

“When it is too late to prevent the problems, then the framework must allow failing banks to be reorganised and wound down, minimising the impact on the financial stability and the economy”, he said.

He would bring forward a communication on the plan in June — the first step in putting together proposals that would then require the consent of the member states and European Parliament, which could take a number of years.

Whether Ireland could dip into its own fund to repay some of the bank debt was doubtful, economic sources at the Madrid meeting said.