The EU has “very little time to stop bank runs and the resulting disintegration of monetary union.”

EU Seeks Lender Levy, Debt Losses as Step to Banking Union

Failing banks’ senior unsecured creditors may be forced to take losses and lenders may be made to pay levies under European Union proposals to deal with crisis-hit banks that will be published tomorrow.

Michel Barnier, the bloc’s financial services chief, will argue that the measures, which would also require governments to lend to each other as a last resort in a banking crisis, are needed to take taxpayers off the hook for rescuing distressed lenders, EU officials said in Brussels today.

Barnier said last week that the plans may serve as a stepping stone to a “banking union” in the 27-nation bloc, with a single EU-level fund to deal with stressed lenders, and more unified supervision of banks, as lawmakers seek to bolster confidence damaged by debt turmoil.

The draft law is “too little, too late, like all the authorities’ crisis actions so far,” Richard Portes, professor of economics at the London Business School, said in an e-mail. The EU has “very little time to stop bank runs and the resulting disintegration of monetary union.”

EU leaders, including European Central Bank President Mario Draghi and European Commission President Jose Barroso, have called for a banking union with more coordination of regulation, at least by governments in the 17-nation euro area. EU President Herman Van Rompuy plans to report on proposed “building blocks” for deeper integration in the euro area to the next summit of EU leaders on June 28-29 in Brussels.

Resolution Fund

Under Barnier’s plans, national governments would impose annual levies on banks to ensure that a minimum amount of money, a so-called resolution fund, is immediately available to stabilize a crisis-hit lender, said the officials, who couldn’t be identified because the proposals aren’t yet public. This would allow regulators to buy time while other steps, such as creditor writedowns, are enacted.

Banks could be asked to contribute additional financing should monies raised through annual levies prove insufficient, according to the officials. Governments would be required to lend to each other as a last resort. They would also be expected to pool their funds to tackle the failure of a large cross- border bank.

This mutual lending is “likely to receive a thumbs down from Germany” and other euro area countries with a triple-A credit rating, said Jesper Berg, senior vice president at Nykredit A/S, Denmark’s biggest mortgage bank. Those nations will see it as a “backdoor” mutualization of debt, he said.

Deposit Guarantees

Barnier will also propose that national deposit guarantee programs could be merged into the planned network of resolution funds, according to the officials.

While a single EU bank resolution fund would be more effective in handling failing cross-border lenders, the EU’s ability to take such a step is currently hampered by the lack of a single banking supervisor, and differing national insolvency laws, the officials said.

The banking union advocated by the commission would include this common fund and unified supervision, along with a single EU deposit guarantee program and a shared rulebook setting out lenders’ prudential requirements, according to the officials.

For the creditor writedowns, regulators will be given the power to impose losses on holders of senior unsecured debt, as well as derivatives counterparties, once a lender’s capital and subordinated debt are wiped out, the officials said.


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