EU President Calls for Central Fund to Wind Down Failing Banks

By Jim Brunsden

European leaders proposed an industry-financed fund to cover costs of winding down failing euro-area banks, seeking to deepen the bloc’s integration and limit fallout from future financial crises.

Nations in the currency bloc should back the creation of a centrally managed “European Resolution Fund,” according to a report prepared by European Union President Herman Van Rompuy. The fund would be financed by levies on banks and could have a credit-line to the euro area’s firewall fund for sovereigns, according to the report.

“Establishing a single resolution mechanism is indispensable,” according to the report, prepared for a summit of EU leaders in Brussels Dec. 13-14. The move “would mitigate many of the current obstacles” to managing bank failure, including “national bias and cross-border cooperation frictions,” the report says.

EU nations have provided 4.6 trillion euros ($6 trillion) of capital injections, guarantees and other support to their banks since 2008, in a bid to prevent a meltdown of the financial system following the collapse of Lehman Brothers Holdings Inc.. The banking crisis has ravaged nations’ public finances, forcing Spain and Ireland to seek international aid.

The European Commission, the 27-nation EU’s executive arm, will make proposals next year to set up the central resolution authority and fund, according to the report, which was drawn up byVan Rompuy with input from European Central Bank President Mario Draghi, Jean-Claude Juncker, the president of the Eurogroup, and Jose Barroso, the president of the commission.

ECB Oversight

The moves to centralize bank resolution are an essential accompanying step to existing proposals that would hand the ECB bank oversight powers, according to the report.

The authority would have the power to impose writedowns, known as bail-ins, on some creditors at failed banks, so “ensuring that the private sector bears the primary burden of bank resolution costs,” according to the document.

EU finance ministers are racing to meet a year-end deadline to agree a deal on legislation to make the ECB a bank supervisor, after they failed to reach an accord during talks in Brussels this week.

The centralized bank resolution system should cover the euro area and other countries that voluntarily sign up their banks for ECB supervision, according to the report.

The EU should also “rapidly” adopt a draft law dating from 2010 that would improve coordination of national deposit guarantee programs, the report says.


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